To The Moon

This reporting season is expected deliver more strong earnings growth, and cap-off a year which profits grew by 40% a share, but the future looks less certain with the rate of growth tipped to plateau into 2022.

The Key Questions for the earnings season：

1. How strong are profits now and looking ahead?

According to financial data company FactSet, the market ought to deliver S&P500 earnings growth of 21.7%. That figure would be lower than the 3rd quarter if it materializes, but still above its long-term average, and would take full year earnings growth in 2021 to around 40%. A key issue for market participants will be what corporates say about future profits, with the rate of growth tipped to plateau going into 2022. EPS was only modestly revised higher for theS&P500in the last quarter, with the majority of companies that have update guidance leading into Q4 earnings revising estimates lower.2. Which sectors ought to drive earnings growth?

Outperformance in terms of EPS growth in Q4 is once again expected to come from areas of the market most sensitive to the economic cycle. Despite a slow-down in growth during the quarter, above trend growth, along with baseline effects, is tipped to see industrials and materials sectors post stronger EPS growth than the broader market. 9 of 11 sectors are expected to deliver positive profit growth, with only the utilities and financial sectors estimated to post a contraction in earnings on annualized basis this quarter.

3. What impact is supply disruptions having on margins?

Perhaps the most pressing issue for companies in the past quarter was the impact of higher costs on profit margins. With supply chains disrupted, commodity and input prices surging, and a labour shortage driving up wages, margins have become eroded as the boom in profit margins since the pandemic reverses. Given the persistence of higher costs, and the expectation it’ll remain a headwind to growth and margins going into 2022, investors will be keen to gauge what impact margin compression will have on future earnings, especially going into a weaker demand environment.

4. How is inflation and higher rates impacting business?

From a macroeconomic point view, inflation and the risk of tighter monetary policy poses a risk to financial conditions going forward. Although still very accommodative in real terms, monetary policy tightening may impact companies’ ability to borrow, services debts and continue to engage in stock buy backs going into 2022. With the Fed likely to hike interest rates in March 2022, and perhaps begin to unwind its balance sheet shortly thereafter, what corporates say about how such a shift in policy will impact both growth and asset valuations may be a source of volatility across the market.

5. How could this earnings season impact the S&P500?

As investors weigh the risks of future Fed policy and the prospect of rate hikes and quantitative tightening, a refresh of micro-fundamentals will be significant in whether the S&P500 continues to come under selling pressure, or whether relatively bearish sentiment can subside. Given the pressure on valuations, especially in heavy-weighted growth stocks in the tech sector, investors will be looking for signs that profits can grow at a sufficient rate to keep the yield in equites attractive. This is especially true given the expectations of flat EPS growth in 2022 and the potential for a downgrade cycle

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