![]() Stocks with low margin momentum versus the S & P 500 include Walmart, Amazon, Ford, Colgate-Palmolive and Starbucks. Among those with positive momentum were companies like Chevron, Deere, Honeywell, J.B. "What it comes down to is management's ability to navigate the current environment." Credit Suisse rated companies in the S & P 500 based on their margin momentum. Companies that are going to see margin pressure are going to get punished for it," said Palfrey. "I think companies are going to see continued margin pressures. But strategists warn that analysts have not been adjusting numbers down that much, and the stock market will react negatively to a spate of warnings and misses. But he does see a rebound to a 10.6% gain in the third quarter. Palfrey said he expects second-quarter earnings to grow by just 5.2%, less than half the 11.7% growth in the first quarter. About 50% of materials companies saw estimates go higher for the quarter, by an average 15%. As for energy, about 86% of companies saw earnings estimates for the second quarter rise by an average 88.3% this year, according to Credit Suisse. That contrasts with just 9% of communications services companies seeing improved outlooks for the second quarter. The earnings forecasts for companies in the index increased by an average 0.3% for the second quarter since the start of the year. Since the start of the year, about 35% of the S & P 500 companies have had positive earnings revisions for the second quarter. "I do think companies that have less margin momentum are susceptible to margins going negative and are susceptible to a deceleration of their businesses." Palfrey said the second-quarter earnings revisions have been most negative for consumer discretionary and communications services companies. "I would imagine companies with greater margin momentum have greater operating leverage, and they're benefiting from underlying trends," he said. Palfrey said he expects to see a greater bifurcation around margins. And now what we're seeing is margins starting to move down." Closely watched by investors, margins are simply the difference between the money a company brings in and what it spends. Up until the last couple of weeks, earnings revisions were moving higher as well, but at a slower pace. "We're seeing revenue revisions moving higher. "I think what is happening is we are seeing inflation beginning to impact certain portions of the market in terms of their margins," said Patrick Palfrey, Credit Suisse senior equity strategist. ![]() Higher costs are also playing a role, especially as consumers are pinched by record high gasoline and rising food prices. ![]() Inventories at some retailers have been building, as consumer demand shifted to different categories as Covid cases fell and consumers returned to social events and other activities. Less than a month ago, Target had surprised investors with an earnings miss and reduced its earnings forecast. Unless you're very clear on your visibility on your end demand, it's a very uncertain time." In its update Tuesday, Target said profits would be pressured by efforts to aggressively clear shelves of unwanted products. The input costs and other issues they have aren't dissipating yet," said Brian Rauscher, head of global portfolio strategy at Fundstrat. "Companies are going to have to start guiding lower and more conservatively. There will also likely be more companies falling short of estimates, once quarterly reports start coming out in July. Strategists say they expect to see more companies issuing profit warnings. The new guidance comes just days after Microsoft, in another high profile warning, said its revenue would be softer than expected due to unfavorable foreign exchange rates. The retailer Tuesday warned for the second time in less than a month that its profits would take a hit from an inventory glut. Target is unlikely to be the only company with a bullseye on it during the upcoming earnings season.
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