Q3 Earnings season in focus | Calamatta Cuschieri

Markets summary

Investors have been anxiously awaiting the start of the Q3 earnings season and bracing for a possible deceleration in corporate profit growth after a strong second quarter. Rising cost pressures amid supply-chain disruptions, high energy prices and material shortages, which are expected to remain in place in the short-to-medium term, will keep the spotlight on margins. Indeed, margins growth trajectory over the upcoming financial periods remains uncertain, given the lack of visibility vis-à-vis the duration of inflationary pressures. Nonetheless, each sector will react differently to the current disruptions, and what is more interesting at this juncture are the forward-looking expectations by the companies reporting for the last quarter of 2021.

Third-quarter earnings season kicked off last week, led by the large banks, predominantly JPMorgan Chase, Citigroup, Bank of America and Wells Fargo. With respect to bank earnings, the reported numbers turned out to be stronger than expected. Moreover, respective management teams have provided reassuring comments about trends in core banking activities that have been neglected in previous quarters, given the fact that the focus was predominantly on the unlocking of loan loss provisions, as opposed to core operations.  

Undoubtedly, the banking sector has its weights in a reporting season, as it sheds light on the economy’s current state, especially at this juncture following an unprecedented 2020 and a yet uncertain 2021 due to a variety of factors, notably the supply chain disruptions and the dampening effect of the coronavirus delta variant.

As banks commenced their normalisation path, while fiscal and monetary politicians are still looking to reposition themselves, it was interesting to see global banks gradually continuing to reverse the expected credit losses booked throughout the pandemic.

More specifically, JP Morgan for instance, delivered robust third-quarter results, which apart from an overall improvement in revenue, these were largely driven by a credit reverse release of $2.1 billion compared to reverse releases of $569 million in the prior year.  

Similarly, Citi Bank last week reported that as the recovery from the pandemic continues to drive corporate and consumer confidence, as witnessed through the Bank’s strong investment banking and equity markets segment results, this has ultimately created improved active client engagement. Inevitably, this had a positive ripple effect on other revenue streams of the bank, namely across card products and wealth management services.

Notwithstanding the fact that the big banks opened the Q3 season with flying colours, the recent rise in input costs will undoubtedly exert additional pressure on companies in the industrial, consumer staples, and consumer discretionary sectors. In this respect, investors will get a true sense of how good or otherwise the corporate profitability picture is after reviewing the upcoming earnings releases.

For instance, Procter & Gamble (P&G), a multinational consumer goods US corporation, reported in its latest update that, it intends to raise prices on more household goods after warning that rising input costs are now expected to be higher than it had originally anticipated. Nevertheless, P&G maintained its full-year earnings projections for 2021.

Inevitably, manufacturers and retailers are feeling the burden from the current inflationary pressures, amid higher raw material prices and increases in shipping and transportation fees. Amongst others, Colgate-Palmolive, General Mills and Kimberly-Clark are just a few of the consumer goods giants who have shifted rising input costs to consumers.

Supply chain bottlenecks and the rising cost of energy, food and rents have kept US headline consumer price inflation higher than 5% for four months during 2021. Nevertheless, Federal Reserve (FED) policymakers continued to label this surge as “transitory”. But, are these companies continuing to see such inflationary pressures as transitory, as the FED suggests? What is certain is that inflation is cost driven, rather than demand driven. In this respect, a prolonged period of cost driven inflation will ultimately result into an overall decline in demand, thus shifting input prices back to normal levels. Nevertheless, the transitional period might be painful for the economy. 

This article was issued by Andrew Fenech, Research Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.