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What To Make Of Earnings Outlook Season
The term, "earnings season" has always seemed misleading. “The market” is a forward-looking entity, always anticipating the next card in the deck. In the market’s eyes (or ears), forward guidance from CEOs and CFOs is far more interesting than a company’s most recent financials, given its role in estimating future cash flows and earnings.
Furthermore, in our opinion, there is no better way to get a pulse on the headwinds facing the economy than directly from the people running the companies. Insights directly from the horse’s mouth are far more valuable than commentary from the media and their interviews with fund managers. This quarter’s earnings release commentary will likely feature more companies issuing forward guidance to help clue us in on the themes that will dominate the next twelve months.
A massive earnings rebound has been priced in by the markets, so it’s likely that the year-over-year earnings growth numbers will not mean much.
We anticipate that the following will be three key themes facing the U.S. business over the next 12 to 18 months:
1. The Labor Market
The demand for employees has been outpacing supply for some time now. A period of sustained upside wage pressure could have a significant impact on longer-term inflation expectations. A cap on productivity equates to an inherent lowered ceiling for profitability.
- How are companies anticipating the current tight labor market conditions to play out?
- Will this tight labor market, which favors the labor pool, translate to sustained higher wages?
- Further, do companies expect continued productivity struggles due to a scarcity of workers?
2. Supply-Chain Normalization
Look no further than a local car dealership to see the effect that a shortage of semiconductors has brought on automobile manufacturing. This is just one example of a supply-chain that is working through supply issues and a backlog.
- How long will disruptions along the supply-chain affect companies’ ability to produce?
- While we expect supply-chains to normalize, the question is: how soon?
3. Business Investment
We know that the best companies do not sit on their hands and wait for risk factors to subside. Business investment is an important component of the U.S. economy and the optimism to invest could signal that we are in the relatively early stages of the next economic cycle.
- How will leadership react to the risks that lie ahead?
- Are businesses securing key supply-chains through capital expenditures (e.g., business investment)? Or, are they investing in technology to increase productivity during a shortage of labor? Odds are, it’s both.
We will be focusing on answers to these questions and will continue to inform our readership. Be sure to sign up for our weekly email newsletter to stay up to date with Blue Chip Partners.
Expressions of opinion are as of this date and are subject to change without notice. The information provided does not constitute tax, legal, accounting, or other professional advice and is without warranty as to the accuracy or completeness of the information. Any information provided is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation to buy, hold or sell any security. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There are limitations associated with the use of any method of securities analysis. Indices are included for informational purposes only; investors cannot invest directly in any index. Every investor's situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Past performance does not guarantee future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct.
