Will earnings reflect skyrocketing costs?

Stocks rallied yesterday as dip buyers took heart in lower bond yields…a rarity in recent sessions.  Producer prices came in hot, but that did not discourage already beleaguered growth stocks.

The final word.  In the markets, there is speculation and there is well…speculation. We think we have a good idea about what the Fed will do next month.  The markets assess all the known information and place their bets, relatively quickly.  Actually, according to one of the key tenets of the much-quoted Dow Theory, the markets discount all known information…always. Also known as the efficient markets hypothesis. In other words, no one person has a leg up on any other. You think you know something about an investment that the market hasn’t already factored in? Well, according to the theory, you are wrong, and it is too late. We can join the healthy debate over that in some other morning note, but for now let’s just leave it by saying, it is hard to predict what might happen to markets and individual companies…in fact it is near impossible to do with any level of consistency. I don’t want you to lose hope, however. WE CAN ABSOLUTELY increase our probability for success by doing extensive research, follow proven management principals, and apply strict discipline. If you are up for that, this is your moment. It is earnings season.

Before we jump into it, the next few weeks will be dominated by earnings which will crash right up into the FOMC meeting next month, so I want to get a final word in on inflation. Sorry, but it is important. Yesterday morning’s Producer Price Index came in at a hot +11.2% when economists were predicting a +10.6% annual change. How hot is that? So hot that it holds the record for the largest annual change since the series first began to be calculated in 2009. This should not be shocking to you unless you have been hiding away in a cabin in the woods for the past 12 months. I won’t get into too much detail, but I do want to highlight the fact that the gasoline cost index jumped by +17.48% in the past month alone. In fact, if you look down the list of categories, most of the big monthly increases came from energy in one way or another. That is not to say that most categories did not go up, but rather, energy was a standout. Economists are pointing to the base effect and hoping that the PPI is at or near its peak. The base effect refers to a situation where the starting month in a calculation goes up, causing the year over year calculation to go down. If you look back a year ago, February and March saw smaller monthly decreases in the PPI which accentuated the year over year calculation, making the growth appear steeper.  The summer months of 2021 grew at a faster pace, which should moderate the yearly calculation.

All this mathematic magic aside, we know that in this coming earnings season, we can expect to hear lots more about pressure on margins due to rising inflation. Companies will enlighten us on how well they performed last quarter and how they dealt with rising labor and material costs. Some will say that high demand for their products offset cost increases. Others will say that they have costs under control. Still others may relate, albeit in a veiled fashion, that they raised prices to maintain margins. We know that labor prices are going higher, and we also know that raw material prices and transportation are higher. Increased demand offsetting margin compression can be dangerous, as the Fed will ultimately tamp down consumer demand in one way or another. The Fed will have a harder time fixing the supply problems that are causing raw material costs to spike.  Analysts will be listening carefully to how companies have dealt with and plan to deal with rising costs, and not necessarily slower sales growth, which should be expected given the aggressive expansion in post-lockdown 2021.  They will be hoping for solid guidance for the quarters ahead as well as clues on how they are dealing with the tight labor market. Welcome to earnings season. 

WHAT’S SHAKIN’

Twitter Inc (TWTR) shares are higher by +10.95% in the pre-market after Elon Musk offered to buy the company outright for $43 billion in cash. The unsolicited, hostile bid is for $54.20 / share.  Potential average analyst target upside: -3.1%.  WHY IS THIS NEGATIVE?  Because the stock is currently trading at a price higher than the average analyst price target. Though that may be interpreted as the stock being expensive, it does not mean that the stock will not continue to trade higher.

Wells Fargo & Co (WFC) shares are lower by -3.03% in the pre-market after the company announced that it had beaten EPS estimates by +9.84% while it missed Revenue targets by -0.99%. Though the company’s net interest margin rose for the first time since 2019, the company continues to struggle with expenses. Dividend yield: 2.05%. Potential average analyst target upside: +26.0%. 

UnitedHealth Group Inc (UNH) is trading higher by +0.56% in the pre-market after it announced that it beat EPS and Revenue estimates by +2.57% and +1.79% respectively. The company raised its full year guidance as well. Dividend yield: 1.07%. Potential average analyst target upside: -0.1%. WHY IS THIS NEGATIVE?  Because the stock is currently trading at a price higher than the average analyst price target.  Though that may be interpreted as the stock being expensive, it does not mean that the stock will not continue to trade higher.

US Bancorp (USB) shares are higher by +2.52% after it announced that it beat EPS and Revenue estimates by +4.96% and +0.89% respectively. In the past month 54% of analysts have revised their price targets 2 up, 10 down, and 10 unchanged. Dividend yield: 3.63%.  Potential average analyst target upside: -21.6%.

ALSO, this morning:  Morgan Stanley (MS) and Goldman Sachs (GS) beat EPS and Sales targets and PNC Financial Services Group (PNC) beat EPS estimates but missed on Revenues. Still to come Rite Aid (RAD), Ally Financial (ALLY), Progressive (PGR),  and Citigroup (C).

YESTERDAY’S MARKETS

Stocks rallied yesterday as dip buyers sought stocks on sale, encouraged by lower Treasury yields. The S&P500 traded higher by +1.12%, the Dow Jones Industrial Average gained +1.02%, the Nasdaq Composite Index jumped by +2.03%, the Russell 2000 Index advanced by +1.92%, and the S&P500 ESG Index added +1.22%. Bonds traded higher and 10-year Treasury Note yields fell by -3 basis points to 2.69%. Cryptos gained by +4.18% and Bitcoin added +4.03%.

NXT UP

• Retail Sales (March) are expected to have grown by +0.6% after a +0.3% gain in February.
• Initial Jobless Claims (April 9) is expected to come in at 170k compared to last week’s 166k new claims.
• University of Michigan Sentiment (April) may have fallen to 59.0 from 59.4.
• The bond market will close today at 2:00 PM Wall Street time and markets will be closed tomorrow for Good Friday.
• Next week will bring us a bevy of earnings along with regional Fed reports, housing numbers, Leading Economic Index, and flash PMIs. Please check in on Monday for calendars and details.