The 4 themes to watch out for this earnings season

by

Jack Derwin

January 19th 2022 3 minute read

We are in for another blockbuster earnings season as market valuations reunite with gravity once more. The big question on everyone’s mind? Is Wall Street finally running out of gas or will it continue to grind higher to break new all-time highs? 

As hundreds of companies open up their books to investors over the next few weeks, these are the four big themes to look out for this quarter.

1. Has tech done its dash?

Almost two years ago the pandemic struck, crushing companies across the board before they got back on their feet and dusted themselves off.

Since then it has really been all about tech and growth stocks. Since April, Tesla has risen 10 times in value. Despite already being worth more than a trillion dollars, Apple has more than doubled again to become the largest publicly traded company in U.S. history. Bellwethers like Walmart and Procter and Gamble on the other hand are up closer to 20% over the same time period. 

After a spectacular couple of years, the question is can these tech companies do it all again? There is speculation that growth stocks have boomed as much as they can for now and may come off the boil as investors rotate into underperforming value stocks.

It is anyone’s guess whether that comes to pass, but this quarter will prove crucial to see which companies have run out of gas and which still have some runway left.

2. How will companies deal with rising inflation?

Part of that conversation is firmly centered around what is actually going on in the U.S. economy and how it is affecting businesses and consumers.

In case you missed it, here’s a quick recap. Inflation – the rate at which prices grow – is rising so quickly in the U.S. that what cost you $1 in November cost you $1.07 in December. That’s a real pain for Americans as the economy runs a little too hot. 

Now the U.S. Federal Reserve – America’s answer to the RBA – says it will hike interest rates and reduce stimulus to try and slow it down.

The expected consequences of that are major. Consumers are going to be less inclined to spend money meaning company earnings generally speaking are going to shrink. All of that will heap pressure on growth stocks especially to justify their valuations. Those that can’t might fall from grace. Those that can might push higher still.

Early warnings and profit downgrades have already sunk the share prices of banks and financial institutions, including JP Morgan and Goldman Sachs, which are particularly exposed to rate hikes. 

In other words, the market could be in for a shakeup like we haven’t seen in some time. If investors are willing to see through the noise, such volatility might just present some buying opportunities. 

3. Can businesses deliver?

If you’ve been sleeping under a rock, you may have missed the fact that supply chains are stretched to their limit right now. Whether it’s the food in your fridge at home or the computer chips in your car’s dashboard, all manner of products are being delayed or proving hard to find.

At the same time, consumers remain fairly cashed up after two years of record stimulus and few avenues to spend it. Those companies that can secure their own supply chains and get their goods into the hands of their customers are unsurprisingly going to do much better than those that can’t. 

Just look at Tesla. Despite the fact that automakers around the world are struggling right now to build and ship new cars, Elon Musk’s EV company has so far managed to beat its own delivery targets each quarter. 

Others like Amazon are going to such lengths as to lease long-haul cargo planes to circumvent shipping delays. The strategy is expensive and inefficient but its earnings will show whether or not it is worth it to retain market share.

4. How much of the market is going meta?

A lot has happened in the last few months, not least of which has been Wall Street’s embrace of the virtual. Facebook became Meta and everyone from Adidas to Ralph Lauren is launching (or talking about launching) their own NFT collection. 

Clearly there’s a lot of exuberance around digital assets and there are plenty of corporates who are more than happy to follow each other into the emerging market. Many are selling out almost immediately and delivering major companies a new source of revenue.

But as we enter earnings season, it will be fascinating to see how many more announce their intention to get involved. What will be more telling will be how serious companies are about the space long-term and how well they can actually execute a strategy. 

This earnings season you can expect more projects to be unveiled. But the fact is that in three months we might have the first indication of whether or not so many companies were right to rush in – and whether the upside justified the risk.