Happy Halloween! Last week the market got over its fear of inflation and pushed the S&P 500 up to a new all-time high. After looking at the charts, we are expecting the index to continue moving higher through the end of the earnings season. Earnings are in fact to blame for the rise in index prices. Although inflation is an omnipresent factor in both revenue and earnings growth both revenue and earnings growth are better than expected. There is a caveat, however, to the earnings outlook. While Q3 earnings continue to come in better than expected there are still significant headwinds to overcome and the Q4 season to work through. Supply chain disruptions and manufacturing shutdowns in Vietnam and elsewhere in Asia are only now getting resolved and that will have an impact on availability. Haverty Furniture (NYSE: HVT), specifically, says they have enough inventory for the present but foresee availability issues in the latter half of the fiscal 4th quarter. Apple (NASDAQ: AAPL) made headlines on Thursday when it reported earnings, missing consensus for the first time in years because of the microchip shortage. The microchip shortage is expected to last until late next year and could be bad news for most manufacturers. Chips are everywhere. That’s good news for the chip industry, however, and that has been seen in earnings reports as well. The takeaway from the earnings reports is that demand is strong and business is good, just not as good as it could be. Margins are holding up, too, but there is some shrinkage to be found. Input costs appear to be stabilizing but are still high and expected to remain high for the foreseeable future. As for consumer-level inflation, the Fed’s favored tool for watching inflation was released Friday morning and came in hotter than expected. What this means for the near term is that S&P 500 margins should continue to hold up, the bad news is that we’re all paying nearly 5.0% for our consumer items that we were last year and we don’t think inflation is going to slow soon. Too many S&P 500 companies are talking about the need to hike prices again for us to think inflation was going to slow. This week, there’s a host of earnings reports to be on the watch for but the biggest news of the week will come on Wednesday. Wednesday is the October meeting of the Federal Open Market Committee and should bring us the first of the taper. If not, well, if not Mr. Powell is going to come under some heavy criticism because it seems like the Fed is way, way behind the curve. There is a 0.0% expectation the FOMC will raise rates but the outlook for the first hike is creeping forward. The CME’s Fedwatch Tool is indicating a more than 50% chance of at least one hike by June 2022. This Is What To Expect In The Week Ahead A Busy Week Of Economic Data Last week’s economic data was positive but lackluster with few reports of real interest. The ones that caught our attention were the Consumer Confidence and GDP figures, aside from the PCE Price Index, of course. Consumer confidence rose to 113.8 versus an expectation for a decline to set a new high. This is good news for an economy struggling with inflation and suggests sales and margins will hold up in the current quarter. The GDP figure was a whiff, but we expected that due to supply chain challenges. As good as the Q3 results are they could have been better if not for systemic hurdles cutting into sales. The good news is that most of that lost GDP is still waiting to be unleashed, a lot of it is sitting in container ships off the coast of California. This week is going to be a busy week because of not only the FOMC meeting but the NFP report as well. It’s the turn of the month again and that means the monthly employment figures as well as the ADP report and the Challenger, Gray & Christmas report on layoffs and hirings. Based on the 8.42 million Americans that have fallen off the unemployment rolls over the last month, and the record-high number of job openings, we expect this number to be a blowout. Mid-single digits millions at least. If it doesn’t happen now (in the employment data) we don’t think it’s going to and that is bad news for America. Another Weak Of Peak Earnings Season More than 55% of the S&P 500 Q3 earnings reports are in the bag and the season is progressing well. The blended rate for earnings growth will top 40% YOY going into next week and next week will be another busy week of peak reporting. We are expecting reports from over 100 S&P 500 companies along with hundreds of mid and small-cap names of interest. As for the growth rate, it is better than the consensus estimate going into the season but is still falling short of our expectations for the season. The index outperformed consensus by more than 25% over the past year and we are far from hitting that level now. The outlook for growth is still positive but there is a caveat. Growth is slowing. The pace of growth is still expected to fall to about 23% from this quarter’s 40% or greater and then fall again in the first quarter of next year. The good news is that outlook for both the 4th quarter and the 1st quarter are on the rise which should help keep price action moving higher. Our Focus List For The Week Our focus list for the week begins on Monday morning with a report from ON Semiconductors (NASDAQ: ON). ON Semiconductors is a U.S.-based semiconductor manufacturer and one working to build out its supply chain and production capacity. The company services a wide range of industries and is in high demand with notable demand from the EV industry. The analysts are expecting revenue to accelerate sequentially to a record high and we see upside risk in the numbers if only because of proximity to U.S. manufacturing demand. Clorox (NYSE: CLX) reports Monday night and could give an interesting report. The company was in high demand at the start of the pandemic but has seen that demand slack off over time. The surge of Delta-COVID, however, may have juiced results and that could spur a rebound in the stock. Shares prices have been in decline along with earnings but the stock is still trading nearly 30X its earnings. A solid earnings beat could get the market interested again. LCI Industries (NYSE: LCII) reports on Tuesday morning and might be the most exciting report of our week. The company makes parts and components for the RV industry and sales of RVs are off the charts. Both Thor Industries and Winnebago reported strong sales, rising backlogs, and empty dealer lots along with ramping production so we have high hopes for LCI Industries. The analysts are expecting a slight sequential downtick in revenue from last quarter’s record, we think the company will comfortably cruise by this figure. Scott’s Miracle-Gro (NYSE: SMG) reports on Wednesday morning and should also give a strong performance. The company’s growth efforts have been supported by the post-COVID trends and trends within the cannabis market so growth is expected. The analysts are expecting the usual seasonal downswing in fiscal 4th quarter revenue but we think their estimate is still too low given the companies growth, earnings, and dividend. The price action appears to be bottoming ahead of the release and is ripe for a reversal. Trading at 9X earnings and yielding 1.8% we like the stock at these levels ourselves. This is the chart of the week.
 Wayfair (NYSE: W) reports on Thursday night and runs the risk of missing the consensus. The company is doing a great business and is supported by eCommerce and home furnishing trends but is also heavily dependent on shipping, freight, and the international supply chain. If the company was able to overcome shipping issues and deliver products revenue should be good but margins will come under pressure. If not, the stock could fall below its recent support levels until supply chain headwinds cease to blow. Carvana (NYSE: CVNA) is one we have high hopes for. The used car market is tight but demand is still high, margins are widening, and Carvana’s all-digital experience is one that we like. The analysts are expecting a sequential decline in revenue that has the company set up to outperform. There is also a high 18% short-interest to be aware of so this stock might really pop if results are as good as we think they can be. Canopy Growth Company (NASDAQ: CGC) rounds out the list on Friday morning when it reports. The key to watch out for is profitability, the growth aspect of the cannabis story is played. If and when Canopy Growth Company can start operating with sustainable profitability the stock might begin to perk back up. Until then, remember the trend! Thomas Hughes
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