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Making Sense of the Q3 Earnings Picture and Beyond

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One enduring feature of the corporate earnings landscape that unfolded following the initial Covid-related disruptions has been the steady improvement in estimates. The favorable revisions trend got underway in July 2020 and gained pace in the following quarters.

However, recent updates on the revisions trends have been somewhat disconcerting, as you can see in the chart below that tracks the evolution of Q3 earnings growth expectations.

Image Source: Zacks Investment Research

What we see here is that the trend appears to have shifted course over the last few weeks after remaining modestly positive since the start of the quarter. This loss of momentum is likely tied to the emerging economic slowdown, which in turn is likely a function of the Delta variant. Estimates of GDP growth have been steadily coming down and currently stand around 3%, roughly half of the growth rate expected a few months back.

We also need to keep an eye on the margins outlook, given rising cost trends in labor, inputs, freight/logistics and other line items.

That said, the market appears to agree with the Fed’s assessment of this trend as ‘transitory’ and a function of Covid-related disruptions that will eventually even out. This view is reflected in current consensus estimates, as you can see in the chart below.

Image Source: Zacks Investment Research

This ‘transitory’ view of the ongoing cost pressures is even more pronounced in the annual view of the margins picture, as the chart below shows.

Image Source: Zacks Investment Research

We all know that the ‘transitory’ or otherwise debate has implications for Fed policy, which is as important for the market as the outlook for earnings and margins.

To bring the conversation back to the revisions trend, it is important to point out that estimates for 2021 Q4 have nudged up in recent weeks even as Q3 has stalled........

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