Q3 earnings season is just about done, and it's another in a string of strong earnings seasons that has exceeded analysts' estimates by many metrics. The remarkable outperformance is another sign that some doses of inflation are actually stimulative for corporate profits despite the challenges imposed.
It's also one of the reasons that the stock market has been so strong in recent weeks despite some headwinds emerging like increased doubts about the Democrats' reconciliation bill passing the Senate, the Federal Reserve fully committing to its taper path, and a bump in coronavirus case counts following a drop in September and October and then plateau for most of November.
Q3 Stats
So far, 95% companies in the S&P 500
Another positive is that profit margins remained elevated and close to last quarter's 13.1% level at 12.9% level. This is despite a record number of companies talking about supply chain issues on earnings calls. Overall, companies have been able to raise prices to offset higher material and labor costs. Notably, this profit margin is higher than pre-pandemic levels.
Going into earnings season, analysts were expecting 24% earnings growth and this number has been steadily hiked as more companies have reported positive surprises. In Q4, analysts are expecting earnings growth of 20% and for the full year, they see 40% earnings growth.
One potential concern is that 46 companies have reported negative EPS guidance, while only 25 companies have reported positive EPS guidance. Another is that the S&P 500's forward P/E ratio is currently at 21.4 which is slightly above long-term averages of around 18. So far, valuation hasn't mattered but it tends to matter in environments when the Fed is tightening.
