Earnings Estimates Continue To Rise And Should Improve

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In his Daily Market Notes report to investors, while commenting on earnings, Louis Navellier wrote:

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Earnings To The Rescue

This morning, despite bond yields reaching even higher before pulling back, stocks are seeing a relief rally as Bank of America Corp (NYSE:BAC) and Morgan Stanley (NYSE:MS) handily beat estimates and traded up unlike yesterday's disappointment in Goldman Sachs (NYSE:GS) cost squeeze on profits. Equity indexes are all modestly in the green, but still far from recovering the stiff correction on Tuesday. So far 43 companies have reported earnings and 77% have beat earnings estimates, which sounds good, but last quarter 88% beat.  Those who beat earnings estimates did so by 7.4% so far, down from 15% last quarter.  That's still a 25% y-o-y growth rate but last quarter it was 30%. Somewhat more troubling was a stepback in estimates for 1Q22; + 9.4% vs 9.8% growth, and 2Q22 2.4% vs 2.5%.  Although minor and still early, they are headed in the wrong direction.

While earnings surprises are beginning to slow from last year's torrid pace, estimates continue to rise and should improve as companies adapt to the new world of higher inflation and higher interest rates. Growth remains and the post-pandemic reopening has yet to transpire. Take advantage of the recent pullback to position yourself for better days ahead.

High Lumber Prices

The economic news this week was positive.  The Commerce Department on Wednesday announced that housing starts rose 1.4% in December, which was substantially higher than economists’ consensus estimate.  Even better, permits for future home building surged 9.1%.  So despite higher mortgage rates, the homebuilding industry remains very resilient.

Interestingly, the Biden Administration initially cut the Trump Administration’s 20% duty on Canadian soft lumber to 9% in December 2020 but is now largely reversing its policy.  Specifically, the Biden Administration in November doubled the duties on Canadian soft lumber to 17.9% after reviewing its anti-dumping and previous duty order.  According to producer price index data, the price of softwood lumber rose 24.4% in December due to the Biden Administration duty increase, so as the federal government looks for the sources of inflation, other than the tragic floods last year in Canada that caused lumber prices to spike, the other reason lumber prices are rising is attributable to the U.S. trade policies.

The New Pricing Power

One theme of interest is that of pricing power in the new world of higher inflationProcter & Gamble had a minor beat of 1% in earnings but had 6% organic sales growth, half of which was from higher prices. That is very likely to become a discussion point in earnings calls going forward, both the ability to raise prices to improve margins as well as to pass through cost increases to protect margins.

The port bottlenecks at the Ports of Long Beach and Los Angeles are expected to persist due to some Longshoremen testing positive for Covid as well as China’s “zero-Covid” policy that has locked down travel in four important Chinese port cities.  As a result, trade data is expected to be erratic in the upcoming months.  These port disruptions also contribute to inflationary pressures, so any inflation relief may be postponed until the second half of 2022.

Turning to the weekly jobs data, the Labor Department reported that unemployment claims in the latest week rose to 230,000. Continuing unemployment claims in the latest week plunged to 1.599 million, which was a big surprise. Overall, it appears that Omicron may be impacting weekly unemployment claims, but as long as continuing claims continue to decline, it bodes well for an improving job market.

Coffee Beans

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