It’s corporate earnings that move markets, and for much of this year, strong earnings expectations have been powering broader equity benchmarks to new highs.

However, that started to change in September and, not surprisingly, the ninth month of the year was just the second monthly loss of 2021 for the S&P 500.

“In September, consensus estimates for 3rd Quarter earnings ticked lower for the first time this year. Earnings growth is still expected to be 24% for Q3 on 12% sales growth, but the inflection seen in the above graph is giving investors reason for pause. Earnings estimates for the full 2021 calendar year declined for the first time this year, while estimates for 2022 have leveled off at 9% growth,” says Nationwide’s Mark Hackett.

A big reason that third-quarter S&P 500 earnings forecasts are matriculating lower is ongoing supply chain woes. As Hackett notes, a bevy of marquee S&P 500 members are confirming as much.

“Supply chain issues, input cost pressures and labor shortages have put pressure on company profits. Firms across the industry spectrum, including Sherwin Williams, Nike, FedEx, Costco, GE, 3M, and DR Horton, warned on earnings in their Q2 earnings announcements,” says Hackett.

With third-quarter earnings season fast approaching, plenty of analysts and investors will be wanting to hear what companies have to say about supply chain issues. Some of that angst could be concentrated in consumer-intensive sectors because the holiday shopping season is essentially here, and some market observers are already saying that this isn’t the year to delay shopping. Rather, it’s better to start early to avert supply chain disappointment.

Getting back to earnings, equity benchmarks are already richly valued, indicating that stocks may not be able to generate much more upside if earnings estimates continue falling.

“Given that the S&P 500 continues to trade at a lofty 20-times forward earnings estimates, the market at present is reliant on a continued strong earnings environment. If most of the current inflation and supply chain pressure prove to be transitory, revisions could resume their upward trajectory. But if stresses continue and rates rise, current stocks valuations will be increasingly difficult to justify,” concludes Hackett.

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