BofA with the note:
3Q: Expect an in-line quarter, but guidance could be ugly
S&P 5003Q earnings kick off this week. Following another huge beat in 2Q, 3Q EPS has risen 3% over the past three months to $49.06 (+27% YoY); typically the estimate falls by4% into the quarter. Consensus forecasts imply the 2-year growth rate falling sharply to +16% vs. +27% in 2Q amid supply chain issues and the delta variant-driven slowdown. While there are reasons to be cautious, earnings misses are extremely rare: since 2009, there have been only two quarters (out of 50) when earnings missed consensus (2Q11 & 1Q20). We expect earnings to come in in-line with consensus and revise our 3Q EPS down by $2(to $49)and 4Q by $1. But the main focus will be around guidance (which started to soften) and we believe 2022 EPS will be revised lower.
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Supply chain worsening…yet analysts see peak’22 margins
Though margins expanded to record highs in 2Q, companies highlighted increasing difficulties passing through cost inflation. Since then, issues have worsened: supply chain news stories increased 74% and freight rates from China rose 20% (Exhibit 10), with record backlogs at the West Coast Ports. In 3Q, we also saw a near-record number of profit warnings (third highest since 2011), mostly due to supply issues. Demand remains robust, but soaring inflation poses downside risks. While analysts have baked in margin contraction this quarter (non-Financials net margins-70bps QoQ), we see big risks to 2022 numbers, where analysts expect record margins. The #1 screen request we receive is for companies with pricing power–see our screen inside. Also see Exhibit 41 for companies that mentioned “supply chain” the most during 2Q earnings calls as potential laggards.
Other headwinds: wages, China, commodity prices
Despite the limelight on supply chain, wage inflation is just as big of a headwind (if not bigger)–the BEA estimates wages are as much as 40% of total private sector costs. Slowing China and its property sector issues also pose risks to US multinational. Higher oil prices have historically been positive for S&P earnings (every 100bps move up in WTI added 50bps to S&P earnings growth), but Energy companies’ capital discipline could translate to a lower earnings multiplier (i.e.less revenue for energy capex beneficiaries). Soaring gas prices also add pressure to Chemicals and Utilities. Higher oil could be a headwind rather than a tailwind this time.
2Q wrap: A big 17% beat, but sentiment dips 2Q EPS came in at $52.58(+88% YoY; a 17% beat). However, corporate sentiment dipped from the 1Q peak amid accelerating cost pressure, and companies’ optimism also plummeted from record levels in the prior two quarters. Capex rebounded 17% YoY, but remained muted vs. 2Q19 (-1%). Beats continued to see limited alpha, while misses were penalized more than the historical average (Exhibit 34).