Starting off strong? The early read on U.S. Q3 earnings season

October 15, 2021 | by
Paul Eitelman, CFA
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Disclosures

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

This material is not an offer, solicitation or recommendation to purchase any security.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.

The Russell logo is a trademark and service mark of Russell Investments.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty.

Indexes are unmanaged and cannot be invested in directly.

CORP-11925

On the latest edition of Market Week in Review, Chief Investment Strategist for North America, Paul Eitelman, and Head of AIS Portfolio & Business Consulting Sophie Antal Gilbert discussed early results from the start of third-quarter earnings season in the U.S. They also chatted about credit growth and property-sector weakness in China and reviewed the latest numbers on U.S. inflation.

U.S. Q3 earnings growth already surpassing expectations

Third-quarter earnings season in the U.S., which began the week of Oct. 11, is off to a strong and encouraging start, Eitelman said, noting that so far, S&P 500 reporting companies are generally beating expectations by a wide margin. “With only a few days of results, earnings-per-share growth is already tracking two percentage points ahead of consensus expectations, at 32%,” he stated. In the course of an entire earnings season, growth expectations are typically upgraded by about five percentage points—so being nearly halfway to that mark in just a few days’ time is quite a feat, Eitelman said.

The strong growth in earnings is especially good news for investors, he added, because by most standard valuation measures, the U.S. equity market is fairly expensive at the moment. “This means that, going forward, investors probably aren’t going to see much in the way of returns from multiple expansion,” he said. Rather, they’ll have to rely on strong earnings growth to drive equity returns—and the early results suggest this won’t be a problem, Eitelman remarked. “Exceptional earnings growth certainly was the key story during the first and second quarters of 2021—and it’s very encouraging to see this trend continuing,” he stated.

Could China’s property-market woes lead to an economic slowdown?

Shifting gears to China, Eitelman said that recent developments pertaining to the country’s slowdown in credit and its indebted property sector have trended more negative in scope. For instance, he noted that Chinese credit growth—typically one of the more reliable indicators of Chinese economic activity—missed consensus expectations during September, with essentially no growth observed.

“China’s been on a recent trend of decelerating credit growth, but analysts were hoping for a turnaround in September, due to recent supportive measures from policymakers. That didn’t happen—and it’s certainly a bit disappointing for the country’s short-term macroeconomic outlook,” Eitelman remarked.

Meanwhile, China’s property market has been making plenty of headlines over the past few weeks, he noted, mainly due to the debt woes of real-estate developer Evergrande. However, the problems in the nation’s property sector aren’t limited to just Evergrande, Eitelman explained, noting that a number of leveraged Chinese property developers are constrained in their ability to borrow money to finance ongoing operations. “A handful of these developers have either missed a coupon payment on an offshore bond, delayed a payment or warned about missing a payment—all of which are signs that China’s property-market issues are starting to become a little bit broader,” he stated.

The situation merits close watching, Eitelman said, with some concerns that weakness in the property sector may lead to a slowdown in Chinese economic growth into early 2022. So far, however, this weakness hasn’t spilled over into the country’s banking sector or the broader Chinese economy, he noted, which is a fairly encouraging sign. “Right now, China’s property-sector issues look relatively contained, but they do pose a risk to the global economic outlook, and will have to be carefully monitored,” Eitelman remarked.

U.S. inflation outlook: What do the September readings suggest?

Turning to inflation, Eitelman noted that U.S. core inflation—as measured by the Labor Department’s core consumer price index (CPI)—rose by 4.0% in September on a year-over-year basis, matching August’s gains. “Overall, the U.S. actually saw very little sequential inflation increases during September, with core inflation a bit softer in general,” he said, characterizing the latest data as mildly encouraging. While Eitelman remains of the view that recent inflationary pressures will ultimately prove to be transitory, he cautioned that the situation is far from resolved. For instance, so-called shelter inflation—which measures home prices and rent prices—ticked up last month, Eitelman said. “Shelter costs tend to be one of the stickier and more cyclical drivers of U.S. inflation,” he explained.

Ultimately, concerns around medium-term inflation risks remain front-and-center, Eitelman said, especially amid the much-publicized supply-chain bottlenecks. “Our view, from a baseline perspective, is that as the calendar turns to 2022, many of these intense supply-chain issues will begin to resolve themselves, allowing inflation to step down close to—or even a bit below—the U.S. Federal’s Reserve preferred 2% target,” he concluded.

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Disclosures

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

This material is not an offer, solicitation or recommendation to purchase any security.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.

The Russell logo is a trademark and service mark of Russell Investments.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty.

Indexes are unmanaged and cannot be invested in directly.

CORP-11925