Buyers search for hints of inflation in earnings within the week forward

Traders on the floor of the New York Stock Exchange.

Source: CNBC

The outcome will be the focus of attention for investors in the week ahead as they know if rising costs are pushing margins and signaling an increase in inflationary pressures.

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

After a week, companies have outperformed earnings estimates by more than 84%, according to Refinitiv.

This three-month period is the first to be compared to last year’s profits that were hit by the pandemic. Earnings growth for the S&P 500 is an impressive 30.2% this quarter based on actual reports and estimates.

According to FactSet, this is the best three-month period since the third quarter of 2010.

Signs of margin pressure?

Big banks like JPMorgan Chase, Goldman Sachs and Bank of America reported better-than-expected earnings last week.

The S&P 500 ended the week at a record high of 4,185, up 1.4%. The Dow, which was up a fourth week, rose 1.2 to end the week on a record 34,200. Nasdaq was up 1.1% that week to hit 14,052.

Utilities were the top performing large S&P sector, up 3.7%, followed by materials, up 3.2%, and healthcare, up 2.9%. The technology gained 1%. Financials rose 0.7% while industrials rose 0.6%.

Lori Calvasina, head of US equity strategy at RBC, said she was watching next week’s earnings for signs of margin pressure from higher commodity prices, supply chain issues and other cost factors.

“These big forces that are currently threatening margins don’t really apply to financial stocks. They apply more to industrial companies, materials companies and consumer companies,” she said.

“In my opinion [sectors] How the industrials give you color on the edges, “added Calvasina.” Edges really are the big question mark for the future. I definitely watch and listen to what companies are going to say about taxes. “

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 not yet clear, the rise in other costs is evident. Fuel costs have risen sharply since the beginning of the year, with oil prices up 30%. Sawn timber prices on the futures market are at an all-time high and copper futures have risen by around 17% since the beginning of the year.

According to Calvasina, companies face headwinds and tailwinds.

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

But not every company will see these benefits. “We could begin to see wage pressure again. Rising raw material costs – rising PPI and rising CPI – these are negative effects on margins,” said Calvasina, referring to the producer and consumer price indices.

Looking for evidence of inflation

Peter Boockvar, chief investment officer at Bleakley Advisory Group, said he is also watching the margin comments carefully for effects on individual stocks, but also on what they say in general about inflation infiltrating the economy.

“The most interesting thing about the result is the profit margins. Some companies will be under pressure because they will see price increases and others not because they can pass it on,” said Boockvar.

He said he would be very careful to see if the semiconductor shortage shows up in tech companies’ earnings. The automakers have already scored a hit and scaled back production due to the lack of chips.

The March CPI showed headline inflation rising to 2.6% yoy. A 9.1% increase in gasoline prices contributed to earnings.

Some of the inflation gains this spring are likely to be temporary as they have been compared to the very low levels seen last year when the economy closed.

Aside from the receipts, the week should be pretty quiet. Federal Reserve spokesmen have paused and are on a lockdown before the meeting in late April.

“It’s really going to be a shift in focus to earnings and the inflation story,” said Boockvar.

Economic recovery

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

Aside from Friday’s manufacturing and services PMI data, little data is in for the coming week. However, following Thursday’s report of 576,000 new claims, markets will be keeping a close eye on unemployment – the lowest level since the pandemic began.

“The sharp decline in claims suggests that job separation rates may normalize, which is a good sign for April payroll,” say Barclays economists. Surprisingly, 916,000 jobs were created in March, and economists have announced that they are now expecting a series of reports that show the workforce has increased by 1 million or more.

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

He said the decline in claims was due to sharp declines in a number of states, including more than half in California and even larger percentage declines in Kentucky and Virginia.

“Unfortunately, I have no confidence that these steps will not be at least partially reversed next week,” he wrote. “The ongoing claims in the special pandemic programs continue to fluctuate up and down each week, with the most recent reading for the period ending March 27 being a down week.”

Watch bonds

Stock investors will also watch the bond market, where yields fell over the past week and then reversed. The 10-year treasury was at 1.59% on Friday after falling sharply on Thursday.

Returns move against price, and the 10-year maturity is the most commonly observed bond security because it affects mortgage rates and other loans.

“The 10-year mark is now trading in the 1.50% to 1.75% range,” said Boockvar.

“It will break under if inflation is temporary and it will break over if it turns out to be different,” he added. “I think we priced in the latest inflation statistics and then we’ll take into account what the real world is saying about corporations.”

Calendar for the week ahead

Monday

Merits: Coca-Cola, IBM, United Airlines, Zions Bancorp, FNB, Steel Dynamics

Tuesday

Merits: Johnson & Johnson, Travelers, Procter and Gamble, Netflix, Abbott Labs, CSX, Lockheed Martin, Intuitive Surgery, Tenet Healthcare, Philip Morris, Northern Trust, Fifth Third, KeyCorp, Comerica

Wednesday

Merits: Verizon, Chipotle, Whirlpool, Nasdaq, Baker Hughes, Anthem, Netgear, Spirit Airlines, Canadian Pacific Railway, Lam Research, Discover Financial, SLM, Halliburton, Knight-Swift Transportation

Thursday

Merits: AT&T, Intel, DR. Horton, American Airlines, Union Pacific, Alaska Air, Pentair, Tractor Supply, Celanese, Seagate Technology Biogen, Dow, Credit Suisse, SAP, Boston Beer, Mattel, Snap, Valero Energy, Freeport-McMoRan, Quest Diagnostics

7.45 a.m. Interest rate decision by the European Central Bank

8:30 am Initial jobless claims

10:00 am Existing home sales

Friday

Merits: American Express, Honeywell, Daimler, Financial Regions, Schlumberger, Kimberly-Clark

9:45 am Manufacturing PMI

9:45 a.m. Services PMI

11:00 am Sale of new houses

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