Q4 earnings season is in full swing, and results are strong. With 59% of the S&P 500 having reported, both the EPS and sales beat rates are well ahead of historical averages. Moreover, forward 12-month EPS estimates surged 3.5% in a single week.
But it’s not all good news for earnings and the stock market.
A surge in estimates
Supply chain bottlenecks constraining growth
It’s hard to believe that we’re approaching a year since the U.S. economy shut down due to COVID. Vaccines continue to roll out though and people are ready to have fun. Strong demand is putting pressure on COVID-impacted supply chains and potentially creating inflationary forces.
Economic activity is stronger than anticipated“Despite experiencing a series of new COVID-19 related restrictions around the world, our results reflect a stronger market environment than we had anticipated, with revenue growth and new opportunities in select markets.” – ManpowerGroup (MAN) CEO Jonas Prising
Strong demand is stretching supply chains“I just want to say that the most interesting thing that’s happening is the rate at which demand has increased. We’ve never seen an increase in demand happened as quickly. And that combined with COVID and the pandemic has really stretched the supply chain…The supply base is generally tight, not just semiconductors, which has gotten a lot of press, but many of our components, are on longer lead times. Our suppliers and we are struggling with absenteeism due to COVID.” – Cummins (CMI) President & COO Livingston Satterthwaite
“I would tell you on the new car side, we lost unit sales, because…we couldn’t replace the inventory…in December, we had many stores below a 20-day supply and that’s a 20 day supply across all model line. So individual hot models you didn’t have any day supply…we sat here a quarter ago and thought by the end of the first quarter days supply would be back up to normal. But because what’s going on with the microchips and some other things, it’s probably going to bleed well into the second quarter before inventories gets back.” – Asbury Automotive Group (ABG) CEO David Hult
The supply chain is not stable“I think one of the problems that we’re dealing with is that the supply chain is not as stable. You know, we’re finding that, you know, [subcontractors are missing deadlines]. Well, what happened? Well, what happened was they got a [de-commitment] from their supplier. They didn’t get some bundles they were expecting. They couldn’t hire some people, somebody tested positive for COVID. So they had to send 50 people home, who had come in contact with it.” – Microchip (MCHP) CEO Steve Sanghi
There’s no slack in the system“…we expect that the constraints we are currently seeing are likely to continue through much of calendar year 2021 and possibly into calendar year 2022…there is no slack in the system. Everything that gets built, get shipped, there’s absolutely no slack in the system.” – Microchip (MCHP) CEO Steve Sanghi
This leads to inflationary pressure“We are seeing quite a bit of commodity inflation and a larger foreign exchange impact as we go into 2021, particularly in Latin America, in Turkey, in India and in South Africa. And we’ve got some commodity inflation coming through, in particular, tea in India, in palm oil, in liquid oils and in food ingredients. So we’ve got some inflationary pressures coming forward. And we do expect mid- to high single-digit commodity inflation in the first half.” – Unilever (UL) CFO Graeme Pitkethly
“We have a situation right now in the supply chain…There’s a huge capacity issue, where there’s not enough capacity, and we know they’re going to have to — they’re going to start spending money around steel, iron ore, mining, copper, plastics, all these things.” – Emerson (EMR) CEO David Farr
“Though we are seeing an improvement in our in-stock levels as compared to where we were during Q2, we were not immune to the supply chain disruptions and rising freight costs, which were prevalent across the industry.” – The Container Store (TCS) CFO Jeff Miller
Global manufacturing remained encouragingly resilient in January despite rising coronavirus disease 2019 (COVID-19) infection rates and fresh lockdown measures in many countries, according to the latest PMI survey data. Especially strong expansions continued to be reported in the US, Germany and Asia excluding Japan and China, notably in India and Taiwan.
However, export growth slowed close to stalling, dampening production growth compared to prior months, with an especially notable renewed fall in exports out of mainland China. Factories worldwide meanwhile also reported that exports and purchasing continued to be dogged by supply delays, which worsened further as demand often outstripped supply and logistics delays caused increased transportation issues. The resulting increase in supplier pricing power and shipping surcharges caused input prices to rise at the fastest rate for almost a decade, with prices charged by factories also hitting a near ten-year high.
An uneven market reaction