Investing
Key themes to watch during Q3 earnings season
The supply and demand mismatch has driven inflation higher. Is it enough to derail the strong earnings momentum?
Our Top Market Takeaways for October 15, 2021.
Markets in a minute
Inflation on my mind
Stocks just had their best day since March. It was starting to seem like investors had cabin fever, given it’s been 29 trading days since the S&P 500’s last new record close – the longest such streak since autumn of 2020. But Thursday’s +1.7% S&P 500 rally delivered gains of +1% or more for all 11 sectors, and brought the index within 4% of last month’s all-time high. The perk-up in performance is mostly thanks to strong Q3 earnings results from many of the season’s early reporters, and the positive momentum continued with further gains for the S&P 500 on Friday morning.
Before we dig into our thoughts on earnings, we would be remiss not to address the most notable data release of the week: September inflation figures. The Consumer Price Index (CPI) print came in close to what was expected: Headline CPI was +5.4% year-over-year, and Core CPI was +4.0% year-over-year. From August to September, core rose only 0.2%—more in-line with “normal” versus the eye-popping prints we saw over the summer.
The notable thing about this month’s report is that it showed the drivers of inflation are starting to broaden out. Car prices (+1.3% month-over-month) are still being squeezed by the semiconductor shortage, while other reopening pressures in areas such as transportation services (-0.5%) and hotels (-0.6%) actually eased. But other, stickier areas such as owners’ equivalent rent (+0.4%) picked up in September by more than what we saw at any point in the last cycle.
That might be read as a sign that the tradeoff between “transitory” inflation pressures and more persistent ones is happening faster than expected, and parts of the market have reacted accordingly. The two-year Treasury yield, for example, headed into Friday at 0.36%, up +6 basis points (bps) versus a week ago, and +14 bps versus a month ago. Ten-year yields have dropped -10 bps to 1.51% since last Friday. The market-priced fed funds rate for the end of 2022 has crept higher, and is signaling at least one rate hike next year.
At this time, we’re not changing our base case assumption that the first hike won’t come until 2023. But we think this cycle will be marked by stronger growth and stronger inflation than the last, and the tail risk of the Federal Reserve hiking sooner is growing. Even so, our Equity Strategists think there’s still plenty of room for rates to rise before they would challenge our optimistic outlook for stocks. That outlook is based on our belief in the strength of earnings momentum, and the third-quarter earnings season that kicked off this week will offer a gut check on that.
Spotlight
Three themes to watch during the 3Q earnings season
It seems likely that the S&P 500 reached peak earnings growth at +89% year-over-year this cycle in the spring quarter (Q2). Nevertheless, we still expect above-average earnings growth and positive revisions as results roll out for Q3 in the coming weeks. In the run-up to the reports, 60% of U.S. companies have issued positive EPS guidance, which is well above the five-year average of 33%. Given that, we have a broadly positive view heading into the Q3 reporting season.
But with that positive stance comes an awareness of several headwinds that companies have had to navigate over the last few months. In particular, there are three key topics we want to hear more about:
1) Supply
Supply shortages have significantly impacted industries globally, and so far this has led to a 1% drop in aggregated Q3 estimates for the S&P 500. Shortages range from labor to commodities, to semiconductors, so various inputs are not as readily available right now as they used to be. This is weighing on businesses that are unable to produce sufficient amounts of goods to meet demand.
We have already heard from a few companies about the negative impact on their businesses. Most notably, reports suggest that Apple will produce 10 million fewer iPhones this year because Broadcom and Texas Instruments cannot supply enough components. The market, though, seems to have been anticipating these kinds of issues, so they’re likely baked into current expectations.
Another example: The truck producer Paccar announced that semiconductor chip shortages reduced deliveries of trucks over the last months. As such, it will be crucial for companies to reassure investors that they are able to overcome the supply chain disruptions during their earnings calls this quarter—companies such as Levi Strauss handled this deftly, reporting strong results earlier this month that beat expectations thanks to the firm’s diversified supply chain across countries.
2) Demand
While the supply side has come under pressure amid shortages and other weather- and shipping-related disruptions, the demand backdrop has remained very supportive. Some estimates suggest that strong demand has accounted for two-thirds of the rise in global manufacturing supplier delays, which is ultimately positive for the growth of companies’ order books.
For example, ASM International, a semiconductor equipment manufacturer, is seeing very strong Q3 order intake. What this tells us is that while semis are in scarce supply at the moment, semiconductor manufacturers are investing in new capacity, ordering new equipment and opening new sites to meet the rising demand for chips in the near future. This lends to the argument that supply constraints should be temporary.
We’re getting upbeat signals outside of the semiconductor segment, too, because consumers remain in good shape and continue to spend the savings they accumulated during the pandemic. Nike, for example, reported a spike in demand in North America, amplified by the back-to-school season and the return to athletics. Earlier this week, the luxury group LVMH reported better-than-expected organic sales growth.
3) Inflation
Constrained supply that meets strong demand ultimately translates into rising prices, sparking the pick-up in inflation over the last few months. On top of that, we have seen wages increase over the last year as well.
Companies are feeling this and are responding to it. We recently heard from Pepsi’s CFO that the company will be raising prices to offset higher commodity, transport and supply chain costs. This is key for earnings season: Investors want to see companies pass on those higher costs to consumers, but they can only do so if they have sufficient pricing power. Ultimately, higher wages and input prices could put pressure on companies’ profit margins in the coming quarters, but we believe businesses are in a position where they can defend their margins by increasing their prices. Recent business survey data confirms this view. As a result, we estimate that margins will remain flattish.
As for the investment implications?
Given the several headwinds that companies are facing at the moment, we believe stock selection into the quarter is key. We think the market will reward those companies with strong pricing power and the ability to reiterate/increase their full-year guidance. We think that makes for a fertile hunting ground for stock pickers, especially those actively managing portfolios of companies levered to the trends that will define this economic cycle.
All market and economic data as of October 2021 and sourced from Bloomberg and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
RISK CONSIDERATIONS
- Past performance is not indicative of future results. You may not invest directly in an index.
- The prices and rates of return are indicative, as they may vary over time based on market conditions.
- Additional risk considerations exist for all strategies.
- The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
- Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.
IMPORTANT INFORMATION
All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.
All market and economic data as of October 2021 and sourced from Bloomberg and FactSet unless otherwise stated.
The information presented is not intended to be making value judgments on the preferred outcome of any government decision.
This material is for information purposes only, and may inform you of certain products and services offered by private banking businesses of JPMorgan Chase & Co. (“JPM”). Products and services described, as well as associated fees, charges and interest rates, are subject to change in accordance with the applicable account agreements and may differ among geographic locations. Not all products and services are offered at all locations. If you are a person with a disability and need additional support accessing this material, please contact your J.P. Morgan team or email us at accessibility.support@jpmorgan.com for assistance. Please read all Important Information.
- The MSCI China Index captures large- and mid-cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs). With 459 constituents, the index covers about 85% of this China equity universe. Currently, the index also includes Large Cap A shares represented at 5% of their free float adjusted market capitalization.
- The Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.
- The STOXX Europe 600 Index tracks 600 publicly traded companies based in one of 18 EU countries. The index includes small-cap, medium-cap and large-cap companies. The countries represented in the index are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Holland, Iceland, Ireland, Italy, Luxembourg, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
GENERAL RISKS & CONSIDERATIONS. Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation/diversification does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g. equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan team.
NON-RELIANCE. Certain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.
Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.
IMPORTANT INFORMATION ABOUT YOUR INVESTMENTS AND POTENTIAL CONFLICTS OF INTEREST
Conflicts of interest will arise whenever JPMorgan Chase Bank, N.A. or any of its affiliates (together, “J.P. Morgan”) have an actual or perceived economic or other incentive in its management of our clients’ portfolios to act in a way that benefits J.P. Morgan. Conflicts will result, for example (to the extent the following activities are permitted in your account): (1) when J.P. Morgan invests in an investment product, such as a mutual fund, structured product, separately managed account or hedge fund issued or managed by JPMorgan Chase Bank, N.A. or an affiliate, such as J.P. Morgan Investment Management Inc.; (2) when a J.P. Morgan entity obtains services, including trade execution and trade clearing, from an affiliate; (3) when J.P. Morgan receives payment as a result of purchasing an investment product for a client’s account; or (4) when J.P. Morgan receives payment for providing services (including shareholder servicing, recordkeeping or custody) with respect to investment products purchased for a client’s portfolio. Other conflicts will result because of relationships that J.P. Morgan has with other clients or when J.P. Morgan acts for its own account.
Investment strategies are selected from both J.P. Morgan and third-party asset managers and are subject to a review process by our manager research teams. From this pool of strategies, our portfolio construction teams select those strategies we believe fit our asset allocation goals and forward-looking views in order to meet the portfolio’s investment objective.
As a general matter, we prefer J.P. Morgan managed strategies. We expect the proportion of J.P. Morgan managed strategies will be high (in fact, up to 100 percent) in strategies such as, for example, cash and high-quality fixed income, subject to applicable law and any account-specific considerations.
While our internally managed strategies generally align well with our forward-looking views, and we are familiar with the investment processes as well as the risk and compliance philosophy of the firm, it is important to note that J.P. Morgan receives more overall fees when internally managed strategies are included. We offer the option of choosing to exclude J.P. Morgan managed strategies (other than cash and liquidity products) in certain portfolios.
The Six Circles Funds are U.S.-registered mutual funds managed by J.P. Morgan and sub-advised by third parties. Although considered internally managed strategies, JPMC does not retain a fee for fund management or other fund services.
LEGAL ENTITY, BRAND & REGULATORY INFORMATION
In the United States, bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.
JPMorgan Chase Bank, N.A. and its affiliates (collectively “JPMCB”) offer investment products, which may include bank-managed investment accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC (“JPMS”), a member of FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPM. Products not available in all states.
In Luxembourg, this material is issued by J.P. Morgan Bank Luxembourg S.A. (JPMBL), with registered office at European Bank and Business Centre, 6 route de Treves, L-2633, Senningerberg, Luxembourg. R.C.S Luxembourg B10.958. Authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. J.P. Morgan Bank Luxembourg S.A. is authorized as a credit institution in accordance with the Law of 5th April 1993. In the United Kingdom, this material is issued by J.P. Morgan Bank Luxembourg S.A., London Branch, registered office at 25 Bank Street, Canary Wharf, London E14 5JP. Authorized and regulated by Commission de Surveillance du Secteur Financier and jointly supervised by the European Central Bank and the CSSF. Deemed authorized by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details of the Temporary Permissions Regime, which allows EEA-based firms to operate in the United Kingdom for a limited period while seeking full authorization, are available on the Financial Conduct Authority’s website. In Spain, materials are distributed by J.P. Morgan Bank Luxembourg S.A., Sucursal en España at its registered address: Paseo de la Castellana 31, Madrid 28046, Spain. J.P. Morgan Bank Luxembourg S.A., is authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. When acting through the Madrid branch, is also subject to the supervision of Bank of Spain and CNMV. Registered with Bank of Spain as a branch of J.P. Morgan Bank Luxembourg S.A. under code 1516. In Germany, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Frankfurt Branch, at its registered address Taunustor 1 (TaunusTurm), 60310 Frankfurt am Main, Germany. J.P. Morgan Bank Luxembourg S.A. is authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. J.P. Morgan Bank Luxembourg S.A., Frankfurt Branch is subject to regulation by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)) in Germany. In Italy, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Milan Branch, registered office at Via Cordusio 3, 20123 Milano, Italy. Authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. When acting through the Milan branch, J.P. Morgan Bank Luxembourg S.A. is also subject to the supervision of Banca d’Italia CONSOB. Milan Chamber of Commerce Registered Number: REA MI-2542712. Registered with Bank of Italy as a branch of J.P. Morgan Bank Luxembourg S.A. under code 8079. In the Netherlands, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Amsterdam Branch, at its registered address World Trade Centre, B-toren, Strawinskylaan 1135, 1077 XX, Amsterdam, The Netherlands. J.P. Morgan Bank Luxembourg S.A., Amsterdam Branch is authorized and regulated by the Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF in Luxembourg; J.P. Morgan Bank Luxembourg S.A., Amsterdam Branch is also authorized and supervised by De Nederlandsche Bank (DNB) and the Autoriteit Financiële Markten (AFM) in the Netherlands. Registered with the Kamer van Koophandel as a branch of J.P. Morgan Bank Luxembourg S.A. under registration number 71651845. In Denmark, this material is distributed by J.P. Morgan Bank Luxembourg, Copenhagen Br, filial af J.P. Morgan Bank Luxembourg S.A. at its registered office at Kalvebod Brygge 39-41, 1560 København V, Denmark. Business Authority Number: 39608510 (CVR). J.P. Morgan Bank Luxembourg S.A. is authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. When acting through the Copenhagen branch, J.P. Morgan Bank Luxembourg, Copenhagen Br, filial af J.P. Morgan Bank Luxembourg S.A. is also subject to the supervision of Finanstilsynet (Danish FSA) and registered with Finanstilsynet as a branch of J.P. Morgan Bank Luxembourg S.A. under code 29009. In Sweden, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Stockholm Bankfilial, at its registered office at Hamngatan 15, Stockholm, 11147, Sweden. J.P. Morgan Bank Luxembourg S.A. is authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. When acting through the Stockholm branch, it is also subject to the supervision of Finansinspektionen (Swedish FSA). Registered with Finansinspektionen as a branch of J.P. Morgan Bank Luxembourg S.A. Organization Reference Number: 516406-1086. In France, this material is distributed by JPMorgan Chase Bank, N.A. (“JPMCB”), Paris branch, which is regulated by the French banking authorities the Autorité de Contrôle Prudentiel et de Résolution and the Autorité des Marchés Financiers. In Switzerland, this material is distributed by J.P. Morgan (Suisse) SA, with registered address at rue de la Confédération, 8, 1204, Geneva, Switzerland, which is authorized and supervised by the Swiss Financial Market Supervisory Authority (FINMA), with registered address at Laupenstrasse 27, 3003, Bern, Switzerland, as a bank and a securities dealer in Switzerland.
This communication is an advertisement for the purposes of the Markets in Financial Instruments Directive (MIFID II) and the Swiss Financial Services Act (FINSA). Investors should not subscribe for or purchase any financial instruments referred to in this advertisement except on the basis of information contained in any applicable legal documentation, which is or shall be made available in the relevant jurisdictions (as required).
In Hong Kong, this material is distributed by JPMCB, Hong Kong branch. JPMCB, Hong Kong branch is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong. In Hong Kong, we will cease to use your personal data for our marketing purposes without charge if you so request. In Singapore, this material is distributed by JPMCB, Singapore branch. JPMCB, Singapore branch is regulated by the Monetary Authority of Singapore. Dealing and advisory services and discretionary investment management services are provided to you by JPMCB, Hong Kong/Singapore branch (as notified to you). Banking and custody services are provided to you by JPMCB Singapore Branch. The contents of this document have not been reviewed by any regulatory authority in Hong Kong, Singapore or any other jurisdictions. You are advised to exercise caution in relation to this document. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. For materials which constitute product advertisement under the Securities and Futures Act and the Financial Advisers Act, this advertisement has not been reviewed by the Monetary Authority of Singapore. JPMorgan Chase Bank, N.A. is a national banking association chartered under the laws of the United States, and as a body corporate, its shareholder’s liability is limited.
With respect to countries in Latin America, the distribution of this material may be restricted in certain jurisdictions. We may offer and/or sell to you securities or other financial instruments which may not be registered under, and are not the subject of a public offering under, the securities or other financial regulatory laws of your home country. Such securities or instruments are offered and/or sold to you on a private basis only. Any communication by us to you regarding such securities or instruments, including without limitation the delivery of a prospectus, term sheet or other offering document, is not intended by us as an offer to sell or a solicitation of an offer to buy any securities or instruments in any jurisdiction in which such an offer or a solicitation is unlawful. Furthermore, such securities or instruments may be subject to certain regulatory and/or contractual restrictions on subsequent transfer by you, and you are solely responsible for ascertaining and complying with such restrictions. To the extent this content makes reference to a fund, the Fund may not be publicly offered in any Latin American country, without previous registration of such fund’s securities in compliance with the laws of the corresponding jurisdiction. Public offering of any security, including the shares of the Fund, without previous registration at Brazilian Securities and Exchange Commission—CVM is completely prohibited. Some products or services contained in the materials might not be currently provided by the Brazilian and Mexican platforms.
JPMorgan Chase Bank, N.A. (JPMCBNA) (ABN 43 074 112 011/AFS Licence No: 238367) is regulated by the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority. Material provided by JPMCBNA in Australia is to “wholesale clients” only. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Corporations Act 2001 (Cth). Please inform us if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.
JPMS is a registered foreign company (overseas) (ARBN 109293610) incorporated in Delaware, U.S.A. Under Australian financial services licensing requirements, carrying on a financial services business in Australia requires a financial service provider, such as J.P. Morgan Securities LLC (JPMS), to hold an Australian Financial Services Licence (AFSL), unless an exemption applies. JPMS is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (Cth) (Act) in respect of financial services it provides to you, and is regulated by the SEC, FINRA and CFTC under U.S. laws, which differ from Australian laws. Material provided by JPMS in Australia is to “wholesale clients” only. The information provided in this material is not intended to be, and must not be, distributed or passed on, directly or indirectly, to any other class of persons in Australia. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Act. Please inform us immediately if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.
This material has not been prepared specifically for Australian investors. It:
- May contain references to dollar amounts which are not Australian dollars;
- May contain financial information which is not prepared in accordance with Australian law or practices;
- May not address risks associated with investment in foreign currency denominated investments; and
- Does not address Australian tax issues.
References to “J.P. Morgan” are to JPM, its subsidiaries and affiliates worldwide. “J.P. Morgan Private Bank” is the brand name for the private banking business conducted by JPM. This material is intended for your personal use and should not be circulated to or used by any other person, or duplicated for non-personal use, without our permission. If you have any questions or no longer wish to receive these communications, please contact your J.P. Morgan team.
