Investors look for signs of inflation in earnings in the coming week

Traders on the floor of the New York Stock Exchange.

Source: CNBC

Profits will be the focus of investors’ concerns over the coming week, as they wonder if rising costs are squeezing margins and signaling rising inflationary pressures.

From Coca-Cola and IBM to Johnson & Johnson and Netflix, investors will hear from a wide range of US companies.

So far, with one week, companies are beating profit estimates by more than 84%, according to Refinitiv.

This three-month period is the first to be compared to the previous year’s profits that had been affected by the pandemic. Earnings growth for the S&P 500 is so far 30.2% for the quarter, based on actual reports and estimates.

That makes it the best three-month run since the third quarter of 2010, according to FactSet.

Signs of pressure on margins?

Lori Calvasina, head of US equity strategy at RBC, said she was monitoring the results for the coming week for signs of pressure on margins due to rising commodity prices, chain issues. supply and other cost factors.

“These big forces that currently threaten margins don’t really apply to financials. They apply more to industrial enterprises, material enterprises and consumer enterprises, ”she said.

“I think [sectors] like manufacturers will give you color on the margins, “Calvasina added.” Margins are really the big question mark in the future. I really watch and listen to see what business is going to say about taxes. “

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President Joe Biden has proposed raising corporate taxes from 21% to 28% to help pay for his infrastructure plan.

While the fate of the tax hike is still unclear, the increase in other costs is evident. Fuel costs have risen sharply with a 30% increase in oil prices since the start of the year. Lumber prices in the futures market are at an all time high and copper futures are up about 17% year to date.

Calvasina said businesses were faced with headwind and tailwind.

“Companies say we’ve found new ways to cut costs. When revenues come back, margins will explode upward, ”she said. “Some of the costs related to Covid will go down. These are some of the positives.”

But not all businesses will see these benefits. “We might start to see the wage pressures come back. Rising commodity costs – PPI increases and CPI increases – these are negative for margins,” Calvasina said, referring to producer prices and consumer price indices.

Searching for inflation clues

Peter Boockvar, chief investment officer at Bleakley Advisory Group, said he is also closely monitoring comments on margins for their impact on individual stocks, but also for what they generally say about inflation which is rising. seeps into the economy.

“What’s going to be the most interesting about the profits are the profit margins. Some companies are going to be crushed because they are going to see price increases and others not because they can pass them on,” said Boockvar.

He said he would pay close attention to whether the semiconductor shortage was manifesting itself in the profits of tech companies. Automakers have already taken a hit and cut production due to the lack of chips.

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the The March CPI showed headline inflation recovering to 2.6% year over year. A 9.1% jump in gasoline prices contributed to the increase.

Some of the gains in inflation this spring are expected to be temporary due to the comparison to very low levels last year when the economy was shut down.

Apart from the gains, the week should be fairly calm. Speakers at the Federal Reserve have taken a break and are in a blackout period ahead of the meeting in late April.

“The focus will really be on earnings and the history of inflation,” Boockvar said.

Economic rebound

Last week, economic reports highlighted how strong economic momentum could be in the second quarter. Retail sales in March rose nearly 10% and jobless claims were the weakest of the recovery.

There is little data in the coming week other than the Manufacturing and Services PMI data on Friday. But markets will keep a close eye on unemployment figures after Thursday’s report of 576,000 new claims – the lowest level since the early days of the pandemic.

“The sharp drop in compensation claims suggests that severance rates may finally normalize, a good sign for April payrolls,” noted Barclays economists. A surprise, 916,000 jobs were added in March, and economists said they now expected a slew of reports indicating payrolls increased by a million or more.

However, Stephen Stanley, chief economist at Amherst Pierpont, says it may be too early to read too much into the claims data, and next week’s report will be important.

He said the drop in claims was due to steep drops in a number of states, more than half of which were in California, and even larger percentage drops in Kentucky and Virginia.

“Unfortunately, I am not convinced that these movements will not be at least partially reversed next week,” he wrote. “Continuing claims in special pandemic programs continue to rise and fall every week, with the latest reading, for the period ended March 27, being a week down.”

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“The 10-year will now trade between 1.50% and 1.75%,” Boockvar said.

“It will break below if inflation is transient and it will break above if it turns out to be otherwise,” he added. “I think we’ve taken the latest inflation statistics into account, and then we’ll take into account what the real world is saying about business.”

Calendar for the upcoming week

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