Lost in the fog of a nascent, Fed-inspired rates tantrum is the imminent onset of earnings season in the US.
We’re still a quarter away from lapping the COVID comps, but the impact is starting to fade. Consensus is looking for “just” 20% YoY EPS growth from corporate America (figure below).
That’s a healthy number, to be sure. And, in all likelihood, earnings will top estimates. But barring a huge aggregate beat, Q4 profit growth will pale in comparison to the prior three quarters, all of which benefited from an easy comparison with 2020.
On the top line, consensus is looking for 15% growth, down from 17% in Q3. Over the next four weeks, 80% of S&P 500 market cap will report.
This feels a bit dry — perfunctory, even — in light of more stimulating discussions around surging real yields, tumbling tech and crypto chaos. That even those of us still grounded in reality find it difficult to get excited about earnings season speaks volumes about what “counts” these days. Profits are passĂ©. The corollary says valuations are too.
As SocGen’s Andrew Lapthorne put it last week, “discussing valuations seems terribly old-fashioned in a world where stocks can jump by billions based on a few more car sales.” Lapthorne was referring to Tesla’s Q4 delivery numbers and the subsequent surge in the company’s market cap.
But even that story had to compete with its own derivative for space above the fold. No sooner had the closing bell sounded on Tesla’s $144 billion day than stories about how much Elon Musk made on paper elbowed their way onto center stage. The number was $34 billion, by the way (figure below).
Indeed, the first three paragraphs of Goldman’s Q4 earnings preview were dedicated to last week’s surge in US yields. “With one eye trained on macro developments,” the bank’s David Kostin wrote, segueing from the rates tantrum to an overview of the three key issues investors will focus on as management teams unveil results for 2021’s final quarter.
Really, there’s only one issue that matters, and that’s margins. Obviously, market participants will be keen on any Omicron-related color to the extent the variant affected results in December, but the most interesting such color would involve discussions about the impact on supply chains or the availability of workers. In other words: Issues related to margins.
“Expanding margins will be an uphill battle for companies in 2022, due in part to persistent labor market tightness,” Goldman’s Kostin wrote, adding that during Q3 earnings calls, “managements bemoaned historic worker shortages, particularly for low-wage jobs in the services sector.”
Since the last round of corporate results, in October, there’s been scant evidence to suggest labor market frictions have eased. November JOLTS revealed a record 4.5 million Americans quit their job, and December payrolls came packaged with a hotter-than-expected read on wage growth. Everyone is trying to keep up with the Waltons. Recall that the profit outlook recently turned a bit hazy (figure below).
“Firms with high labor costs or exposure to wage inflation will face the most difficulty in preserving margins,” Kostin went on to say, noting that a Goldman basket of companies with high and stable gross margins outperformed those with weak and variable margins by 12 percentage points over the fourth quarter.
Goldman does expect upward pressure on wages to moderate, but as the bank cautioned, that “could take several quarters to achieve.”
On the bright side, supply chain pressures may be easing. At least a bit. “Managements employed a mixture of price increases and cost controls to offset surging raw materials and shipping prices” last quarter, Goldman remarked, adding that “market measures of supply chain tightness appear to be slowly easing, and shipping costs have begun to decline in recent weeks.”
Kostin mentioned the possible resurrection of Build Back Better, but noted that Joe Manchin’s decision not to support the legislation as currently envisioned means that even if a compromise that includes tax reform is ultimately reached, it would “only go into effect in 2023 at the earliest.”
So, even if workers and supply chain snags continue to squeeze corporate America, Uncle Sam will be keeping a light touch for the foreseeable future.
anyone know why spy and vxx were down friday?
There’s industries less impacted by labor supply, and less hurt by (or even helped by) inflation and rising rates . . . some of these are very “boring” companies but that’s not a bad thing.
That is an intentionally elliptical comment. Basically what I mean is, the investment universe is not limited to mega-cap tech and unprofitable cloud players trying to cling to 20X sales valuations.
Lots of talk about wage inflation. Little said about unit labor costs. Since output is up and there have been some labor saving innovations I suspect unit labor costs are not going up nearly as fast as wage growth.
S&P 500 margins have risen strongly all year, large companies as a whole have levers to offset wage inflation. If topline growth slows, will those levers still work as well? To extent a lever is simply operating leverage, maybe not.
Where is wage inflation strongest? https://www.bls.gov/news.release/eci.t02.htm
Maybe screen for companies 1) in the industries with lower wage inflation, 2) with highest revenue/employee, and 3) with highest expected revenue growth – either 2 or 3 of these.
Insurance/Banks?… 🙂
the above is not investment advice. Consult your advisor.
Also not investment advice . . . but look at those charts and tell me it isn’t worth spending some time digging there instead of trying to catch 20X P/S knives
I would note that TSLA share price is below where it was at the open a week ago and that the billions Musk made on the one-day spike in the SP has melted away — and then some.
Heck, I’m seeing multitudes of ultra-high valuation pandemic winner/tech names headed back to pre-pandemic levels. Poster child is TDOC, trading where it was in Dec 2019, two entire years of work erased. Is it a “bargain” yet?
I’d argue ‘yes’.
TDOC core benefit to consumers – telehealth – got a significant boost during the pandemic and help create/ingrain new behaviours. Those behaviours proved persistent post pandemic (their revenues went from $1B to $2B in 2021, a year with no real lockdowns). They’re now trading on a P/S of 6 and expecting to grow their top line around 25-30% this year.
I appreciate they’re burning a lot of cash. Assuming this is properly invested to sustain growth, deliver further benefits to consumers and entrench themselves into the landscape, calling them a bargain doesn’t look like hyperbole.
What is TDOC’s moat? Aren’t their doctors all Uber-like contract free lancers? Contracts with insurers, I suppose?
I was a TDOC bull until I needed to consult a specialist in 2020. I was psyched to hear that it would be an online consultation. I’d get to see TDOC in action! So I was surprised to find that the consultation would be via Zoom. A sole, rogue practitioner? Nope. Part of the largest healthcare network in our state. They chose to use Zoom.
Should have pitched it all as soon as I saw who was responsible for the last part of the big run up in price.
Don’t know how things are elsewhere but in KC something like 95% of all doctors are on salary with one of three medical groups. Not a lot of extra capacity.
I don’t know much about TDOC or whatever moat it may have. But the point is that all but the most bearish of us will be looking for bargains among the NASDAQ crushees – if we’re not looking now, we will be in the coming weeks/months.
Some of these growth tech/pandemic winner names were supposed to “grow into their valuations”. But now their growth is slowing.
Another “poster child” stock was growing +40% through 2020, then +33% in 2021, now consensus has it downshifting to +22-24% in 2022-2024. As revenue growth has halved, so has the stock price (-55%). Price/sales has been cut by over two-thirds (from 52X to 16X). Fundamentals and valuation are trying to converge, even if not in a happy way. How much more does valuation need to decline for the stock to be alluring?
I run a reverse DCF model. It is simplistic but effective reality checks often are. The model says that the current price for this stock implies +5% growth in perpetuity after 2026 (end of explicit forecast period). Using my default +3% perpetual growth assumption (look, I told you it was a simplistic model) fair value looks -25% lower fr om today’s price. Hmmm. Might be worth investing a couple days to dig in deep, after all maybe it will sustain +20% growth for some years beyond 2026 which might close that 25% gap? Wait, what happens if I change my rF from 1.78% (I use the 10Y UST) to 2.50%? Now fair value looks -50% lower . . . do I want to bet that this name, in a super competitive cloud software niche, can sustain +20% growth for decade(s) to come? And that the consensus will also think that?
Sigh – on to the next name in the screen.
That’s certainly is as good an approach as most.
I’m looking for similar kinds of stocks that have been pulled down because they were included in a “hot dot” ETF basket. For example, I’m digging into the computer/internet security group again, looking for companies with strong profitable operations which have been dragged lower as people looked to pare their holdings of the “promise stocks” in the group.
@derek that sounds promising. Love finding diamonds in the trash.
@jyl – or a laptop with 1000 Bitcoins! Happy hunting, sir!