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An Ominous Trend Emerges Below The Surface Of A Blowout Q3 Earnings Season

An Ominous Trend Emerges Below The Surface Of A Blowout Q3 Earnings Season

Heading into this week, some 117 S&P 500 companies comprising…



This article was originally published by Zero Hedge

An Ominous Trend Emerges Below The Surface Of A Blowout Q3 Earnings Season

Heading into this week, some 117 S&P 500 companies comprising 33% of S&P earnings had reported results so far. Superficially, the report so far have come in better than expected tracking a 4% beat ($50.91), driven by Financials (+13%) and Energy (+7%) despite mounting concerns ahead of earnings about stagflation and shrinking profit margins. The proportion of beats also remained strong – 79%/72%/62% of companies beat on EPS/sales/both, well above the historical average of 63%/57%/43%, but slightly below last quarter’s 82%/82%/72%.

And yet, despite the strong early showing in Q3 earnings season, storm clouds are starting to emerge.

According to calculations from Bloomberg, with just under of 30% of the benchmark’s members having announced results, the S&P500 is currently on pace to see its profits grow by less than 1% from the second quarter. That would be the smallest quarterly increase since the height of the Covid-19 pandemic sent corporate earnings plummeting early last year. 

(As an aside, stronger-than-expected results from both Microsoft and Alphabet could help widen that margin, Bloomberg’s Matt Turner writes, noting that the tech pair’s combined profits are expected to account for about 12% of the S&P 500 remaining profits this quarter, despite having more than 350 other members on the gauge yet to report. Incidentally, analysts are expecting Google to deliver earnings growth of nearly 64% for the period. Meanwhile, forecasts for Microsoft are slightly less bullish, only calling for a jump of about 14% versus last year.)

Digging deeper, we go to Morgan Stanley’s Michael Wilson who as we noted earlier remains bearish, and pointed to not only the recent flattening out of estimates, but warned that fwd EPS has continued to rise at a slower rate. Perhaps most concerning is that earnings revisions breadth – a key leading indicator – is now falling rapidly for almost all sectors. And since revision breadth is a very good leading indicator for NTM EPS, it’s only a matter of time before NTM EPS begin to decline for reasons including higher costs, supply issues and taxes to a payback in demand that should begin in 1Q.

The biggest threat, however, remain supply chain constraints which pose a risk not only to 3Q earnings and but also forward-looking earnings revisions breadth. As the chart below shows, corporate transcript mentions of “supply chain issues” are at unprecedented levels, while ISM lead time indices across both manufacturing and services are also historically stretched. As excerpts from recent earnings calls (below) reveals, these issues are being discussed by companies in a wide range of industries.

Responding to frequent client questions, where the most prevalent inquiry is “aren’t these risks already in consensus estimates and multiples given these issues have been discussed all year” Wilson says that prior to his work over the past several weeks, he would have made the same assumption. However, 3Q EPS expectations remained extremely resilient into the quarter and as the next chart shows, 3Q EPS expectations for this year actually saw their largest upward revision on a YTD basis since 2002.

This is a problem because as we showed on Friday when demonstrating the market’s panicked selloff on earnings misses, bad news are hardly priced in. Wilson agrees and over the weekend he updated his analysis of EPS surprise, sales surprise and T+1 day price reaction of 3Q reporting companies that discuss supply chain risks on earnings calls. Confirming what we reported, Wilson writes that “relatively lackluster beat rates and outright negative price performance T+1 day continue to be the trend for these companies. As we move into the heart of earnings season over the next 2 weeks, we expect this to continue to be a dominant narrative, especially as we move past the bulk of Financials (where we’re overweight) reporting and into the cohorts that are more sensitive to these risks.”

As the MS strategist further elaborates, “companies that have posted negative 3Q EPS surprises have seen historically poor price performance 3 days after reporting (Exhibit 8). This offers some further confirmation that bad news on the earnings front, isn’t already in the price.” On the other hand, companies that are beating on earnings have seen less of the positive price reaction above what they typically see (Exhibit 9). Indeed, as we said above, “a lot of good news is priced, while the bad is largely not.”

Which brings us back to the big question: will supply chain constraints and associated disappointing reports be enough to affect the price level of the overall index? That remains to be seen. At we touched upon earlier when discussing Wilson’s broader bearish bias, the MS strategist is leaning more toward the idea that we would “need to see retail activity diminish and higher bond yields in concert with these earnings risks in order to lead to a more meaningful selloff in the index.”

That said, a key message from Wilson over the next several weeks is “to stay selective and to stay more defensive in terms of positioning.” He continues to prefer “relatively reasonably priced” Software over Hardware and Semis in Tech, Services over Goods in Discretionary, Financials and Healthcare. Why? Because “these cohorts offer less direct risk to supply chain issues and in the case of Healthcare and Software (relative to broader Tech), offer a more defensive posture.”

Which brings us to some some select corporate quotes on supply chain issues from 3Q earnings season so far:

  • SON: “At a high level, we experienced strong volume growth in many of our businesses, but our third quarter operational results continue to be impacted by significant cost inflation and supply chain challenges.”
  • FR: “There’s so many issues in the supply chain right now and there’s strong demand. So we hope that this level’s off for our tenants’ sake. But the reality is I don’t think it will level off. I think it will – the supply chain issues will continue and the rent pressure will continue because the lack of space and increased demand.”
  • POOL: “Inflation this year will likely be in the 6% to 7% range, up from our previous estimate of 5% to 6%, and it looks like that will repeat again for next year given the global supply chain issues.”
  • GPC: “In our customer discussions, a recent common theme is the supply chain challenges that face all companies.”
  • UNP: “We expect international volumes to be constrained as ocean carriers have recently taken additional actions to speed up their container returns as challenges in labor, port capacity, warehouses and dredge persist. And on the domestic side, opportunities will face continued supply chain challenges with limited haul-away capacity and slower chassis turn times.”
  • SNAP: “We’ve been meeting with a lot of advertisers, and had a lot of meetings here, and we’re hearing from partners across a wide variety of industries and geographies that they’re facing headwinds in their business related to the disruptions in global supply chain as well as labor shortages and labor competition. So when they’re talking about the product, putting marketing into the product when there’s already low margin, for instance, can erode margin. And furthermore, they don’t necessarily want to accelerate the sales of products that they are going to have a hard time getting into the hands of customers. And that is somewhat broad sweeping in terms of the supply chain issues.”
  • BKR: “Operating income for the quarter was $26 million, down 44% year-over-year, largely driven by headwinds from mix of volume, supply chain challenges, and higher R&D costs.”
  • DOV: “So let’s get on the front foot here by providing some color on inflationary inputs, labor and supply chain challenges…Let me start by saying that we’re particularly concerned that there have been no discernible policy changes, particularly in the US to deal with these headwinds, and in fact, many proposed policies run the risk of extending their duration.”
  • RPM: “Raw material shortages and inflation continue to be serious challenges. In order to protect our margins, we are continuing to implement price increases, where appropriate, across all our segments.”

Supply chain issues (and the duration of such production bottlenecks) aside, Wilson writes that “it’s becoming increasing clear to us that 3Q EPS disappointment (which is largely being attributed to supply and cost issues), has the potential to affect forward looking EPS growth expectations as well.”

In contrast to the first week of reporting season when the banks posted standout results and revisions breadth ticked higher, last week saw a lot of companies discussing supply issues as a continued and more pervasive risk than initially thought. The result, as Morgan Stanley notes, is plunging earnings revisions breadth for many sectors and the S&P 500 overall.

Indeed, bottoms-up analysts are beginning to think that these issues may persist beyond just a quarter or two. The chart below shows earnings revisions breadth for the S&P 500 (which is based on FY2 or 2022 numbers in this case). This series is starting to decelerate and is currently at its lowest level since last summer. This indicator is key because it has a strong positive correlation with index price so further deterioration here is critical to watch.

The final chart shows this trend across industry groups and sectors. As Wilson notes, this deceleration is a fairly broad dynamic across these cohorts, which speaks to the reach of these supply chain and cost pressure issues.

Tyler Durden
Tue, 10/26/2021 – 15:32

Author: Tyler Durden


Canadian dollar dips after BoC

Bank of Canada maintains policy The Canadian dollar had a muted reaction to Wednesday’s Bank of Canada policy decision. As expected, the bank maintained…

Bank of Canada maintains policy

The Canadian dollar had a muted reaction to Wednesday’s Bank of Canada policy decision. As expected, the bank maintained the cash rate at an ultra-low 0.25%. The BoC also kept its forward guidance, saying that it expected to raise rates in the “middle quarters of 2022”. Admittedly, that timeline is somewhat vague and provides the bank with plenty of wiggle room if needed.

There were no surprises at the meeting, although some market participants may have been looking for a more hawkish rate statement, given the superb employment report last week. In fact, there are now 185 thousand more people working than in February 2020, the last month prior to Covid.

With Canada’s economy showing strong growth and inflation at a 30-year high, it’s understandable why the markets have priced in a potential hike in the first quarter, ahead of the bank’s guidance. The statement acknowledged that inflation is high and projected strong growth of 4% in 2022, but nevertheless did not bring forward its guidance despite these risks to the upside. This cautious stance stems in large part from the uncertainty surrounding Omicron. The variant’s symptoms have been less severe than previous Covid variants, but it is also more contagious, and it will take time to determine if the Covid vaccines are as effective against Omicron.

Another factor that has an impact on the Canadian dollar is oil prices, as Canada is a major oil producer. The November dip in oil prices weighed on the Canadian currency, but oil has found its footing and a cold winter in North America and Europe could send oil prices towards the USD 100 level, which would bode well for the Canadian dollar.


USD/CAD Technical

    • USD/CAD has support at 1.2618. Below, there is a monthly support line at 1.2477
    • The pair is testing resistance at 1.2666. Above, there is resistance at 1.2898

Author: Kenny Fisher

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Waning Term Premiums And The Riddle Of Surging Inflation

Waning Term Premiums And The Riddle Of Surging Inflation

By Ven Ram, Bloomberg macro commentator and reporter

If you asked your bank manager…

Waning Term Premiums And The Riddle Of Surging Inflation

By Ven Ram, Bloomberg macro commentator and reporter

If you asked your bank manager for a loan, the rate you will be offered will vary proportionally with not only how much you borrow, but also how long you borrow for. That, of course, is a no-brainer since the longer the bank is willing to lend to an individual, the greater the risk of something going wrong. Mainly, they encompass credit and inflation risks, and in the case of institutional investments, liquidity as well.

Yet, in the market for Treasuries and several other major developed markets, investors have recently become indifferent to the risk surrounding the longevity of their loans to governments. In other words, they are essentially saying, there is no more inflation risk in lending to Uncle Sam over, say, 10 years than there is when lending for a far shorter period. That is a massive irony against a backdrop where inflation is Le probleme du jour.

Shrinking term premiums is one major reason why Treasury long-dated yields have fallen after the brisk first quarter that, back then, resembled a juggernaut on the move. (The issue isn’t peculiar to the U.S. by any stretch: investors are willing to loan the U.K. for a 30-year period for well less than 1%, but will readily settle for even less — at around 50 basis points — if the Chancellor of the Exchequer will agree to keep the sum in his state’s coffers for 50 years, thank you. Sure, there are reasons such as demand for ultra-long debt from pension funds, but that’s a discussion for another day.)

Why is it that investors couldn’t seem to care less about earning a decent term premium?

A combination of liquidity, declining natural rates of interest and unbridled expansion of balance sheets — and that’s not an exhaustive list — have got us to where we are now. Getting out of it, though, isn’t going to be easy. Getting into quicksand takes a trice, but last I checked no one had found a way yet to come out of it in one swift ascent.

Tyler Durden
Thu, 12/09/2021 – 08:20

Author: Tyler Durden

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3 Growth Stocks to Buy Before The End of the Year

Recently, the market has experienced increased volatility, with a major factor being the Federal Reserve’s hawkish pivot. The Fed seems to be more focused…

Recently, the market has experienced increased volatility, with a major factor being the Federal Reserve’s hawkish pivot. The Fed seems to be more focused on combating inflation, and the market is now expecting at least two rate hikes next year. As a result, the yield on the two-year Treasury Note has moved up from 0.15% in June to 0.65%. Rising short-term rates are a headwind for growth stocks, which perform their best in environments where rates are declining. 

So, it’s not surprising that growth stocks led the market to the downside last week. A good example is the ARK Innovation ETF (NYSEARCA:ARKK) which is down more than 19% in just the past month. In contrast, the S&P 500 and Nasdaq are down 0.64% and 2.25%, respectively. 

However, I believe this pullback in growth stocks offers investors an opportunity.  The rise in short-term rates may soon be over, as forward-looking inflation measures are moderating at a rapid pace. Further, after the recent steep pullback, many growth stocks have reached more attractive valuation levels. Therefore, investors should consider buying the dip in these three top growth stocks:

Growth Stocks to Buy: Alphabet (GOOGL)

Source: Castleski /

Alphabet recently became the third-most-valuable company in the world with a market capitalization of over $1.9 trillion. The company’s primary source of revenue and income remains Search which is very profitable and maintains a dominant market share. Over the years, GOOGL has expanded into other areas like Google Cloud, Android, Chrome, Google Docs, YouTube, and its venture bets like autonomous driving venture Waymo. 

GOOGL stock was initially an underperformer during the pandemic as ad spending decreased. Further, ads from travel companies were put on hold, and those comprise a meaningful chunk of revenue. However, ad rates and ad spending are now well above pre-pandemic levels as the economy reopens and gradually normalizes. 

The company’s momentum is evident in its results for Q3. Revenue increased by 41% to $65.1 billion, while operating income increased by 32% to $21 billion. For the full year, analysts project EPS growth of 85% and 39% revenue growth. Not surprisingly, GOOGL’s stock is up more than 60% year to date and the company has shown impressive relative strength during this period of market stress. 

GOOGL’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to a “Buy” in our proprietary rating system. B-rated stocks have posted an average annual performance of 19.7% which compares favorably to the S&P 500’s annual return of 7.1%. To see more information about GOOGL’s POWR Ratings, click here.

Workday (WDAY)

A close-up view of a Workday (WDAY) sign in Pleasanton, California.Source: Sundry Photography /

Workday provides enterprise cloud applications with offerings that include financial management applications, cloud spending management solutions, and Workday applications for planning. YTD, WDAY’s stock is up 17%, and that number surges to almost 500% since its IPO in 2013.

Cloud and enterprise software stocks have been among the best performers of the last decade. It’s not surprising when considering that companies are increasing spending on their IT systems, software and cloud systems at a strong rate which is expected to continue over the next decade.

For investors, these companies are fantastic, because they tend to have high margins and recurring revenue. Once companies choose a software or cloud provider, they are unlikely to change often given the cost and complexity of changing systems. Further, once companies have people on their platforms, they are able to unlock more opportunities for monetization. 

Despite the stock’s recent underperformance, the business continues to gain momentum. Its last earnings report showed a 20% increase in revenue to $1.3 billion with over 90% of revenue coming from recurring subscriptions. It also made a new milestone in terms of EPS going from a loss of 10 cents per share last year to a profit of 17 cents per share this year’s Q3.

WDAY has an overall B rating, which equates to a “Buy” in our POWR Rating system. The POWR Ratings also evaluate stocks by various components to give more insight. In terms of its component grades, the stock has an A grade for Growth and a B grade for Sentiment and Quality. Click here to see the complete POWR Ratings for WDAY. 

Growth Stocks to Buy: Expedia (EXPE)

building facade with expedia (EXPE) group logoSource: VDB Photos /

Expedia is an online travel company that operates through multiple segments. Some of its most well-known brands include Expedia, Vrbo,, Orbitz, Travelocity and Wotif. In addition, it offers a range of travel and non-travel verticals, including corporate travel management, airlines, travel agents, online retailers, and financial institutions.

EXPE’s business took a big hit during the pandemic for obvious reasons. However, travel volumes are increasing and during the Thanksgiving holiday were at 90% of 2019 levels. It’s very possible that the recent rise in coronavirus cases and the emergence of the omicron strain could have a short-term impact. However, in the longer-term, vaccination rates and effective therapeutics are signs that the pandemic is close to an end.

The company’s recent earnings report also confirms the recovery in travel. The company topped expectations with revenue increasing by 97% to $3 billion. In total, it had $553 million in net income, a big turnaround from last year’s $31 million loss.  For Q4, analysts are projecting $2.3 billion, a 148%increase and a big jump in EPS to $6.89 per share.

EXPE’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, which equates to a “Neutral” rating in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

EXPE has a B grade for Growth and Quality which isn’t surprising considering its Q3 results and status as one of the top online travel companies. To see EXPE’s complete POWR Ratings, click here.

On the date of publication, Jaimini Desai did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Jaimini Desai has been a financial writer and reporter for nearly a decade. He has helped countless investors take profitable rides on some of the hottest growth trends. His previous experience includes writing for Investopedia, Seeking Alpha, and MT Newswires. He is the Chief Growth Strategist for and the editor of the POWR Growth and POWR Stocks Under $10 newsletters.

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Author: Jaimini Desai

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