Earnings Season to the Rescue

Major stock market averages opened higher this morning, but quickly faded. At the moment, the Dow is up 17 points and the S&P 500 is up .13%. Most of the stock-specific moves are a reaction to earnings announcements (see below). Gold and copper are slipping. Crude oil is up a bit to trade around $84.50/barrel. Both OPEC and US producers are talking about constricting oil production in order to keep prices up. Yes, global demand is fairly strong, but we have the ability to quickly ramp production to keep prices in check. The bond market is trading higher, pushing yields lower for a change. Both Treasuries and corporates are catching a bid this morning.

While still in its opening stage, earnings season is providing some encouraging signs for investors. Companies are generally reporting very good third quarter results. With 57 of the S&P 500 companies having reported, 68% beat Wall Street sales forecasts, and 80% exceeded profit forecasts. Over-delivering vs. expectations is key to pushing the stock market higher. Compared with year-ago levels, aggregate sales are expected to grow by 15% and the profits should rise by about 40%. Beyond the numbers, however, investors are listening closely to what corporate CEOs say about cost inflation and supply chain constraints.

S&P Global (SPGI) reported third quarter results that surprised analysts; the stock is up over 4% this morning. Revenue surged 13% from year-ago levels and profits climbed 24%. S&P provides data and services to banks and investment companies, which are thriving. The company’s CEO noted “strong global economic growth, elevated merger & acquisition activity, strong stock markets, and increased volatility,” which created a “solid underpinning for our business.” He estimates full-year 2021 revenue will grow by a low double-digit percentage.

United Postal Service (UPS) also posted better than expected results and the stock is up 7.5%. Strong demand for the delivery service shouldn’t come as a surprise—UPS has been dealing with that since Covid began. But what caused investors to take notice was pricing power. Price increases, combined with more high-profit packages, drove 13% growth in revenue per package. In addition, UPS has managed labor shortages better than its competitors, and labor costs rose only .6% from year-ago levels. However, just like competitors, fuel and other transportation costs have skyrocketed.

Raytheon (RTX) reported 10% sales growth and the highest earnings-per-share since Covid began. Sales of jet engines rose 25% and avionics sales rose 7%. Bloomberg News says management “didn’t cite supply-chain issues as much as other industrial companies did, saying it is deploying countermeasures, such as sourcing from multiple providers.” Even so, lead times doubled for some raw materials and the company expects to be dealing with shortages and logistics issues through the end of the year. It is also dealing with production delays for Boeing’s 787, which could persist into next year. The stock is down 3% this morning.

Adobe (ADBE) published its annual holiday retail spending forecast. Online shopping is expected to grow somewhere between 5% and 15% depending on Covid. That’s the good news. The bad news, however, is that price inflation on those purchases will average about 9% compared with year-ago levels. And Adobe predicts that consumers will be plagued by out-of-stock items.