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Earnings season: ‘The heavy lifting is in front of us’, strategist says

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Art Hogan, Chief Market Strategist at B Riley-National, joins Yahoo Finance to discuss the outlook on earnings season, supply chain issues, and the housing sector.

Video Transcript

ART HOGAN: Capital markets activity really doing well, net interest margins, loan demands, loan loss reserves coming down and helping balance sheets. So across the board, I think that the bank season kicking us off was helpful. But now we get into the real heart of the season this week where it's not just the regionals, but we have a whole diverse spectrum of sectors that are reporting.

And clearly, we're going to find the haves and have nots. And those companies that have supply chain issues, we're going to hear that on just about every conference call by anybody that manufactures anything-- inflation, labor shortages, et cetera. And what that means to gross margins-- and we really haven't gotten to that point yet-- you know, right now, with a little less than 100 companies having reported, including those companies this morning, we've seen about 86% of companies beat their earnings estimates and about 80% beat their revenue estimates.

What we haven't seen is the typical high number of companies raising guidance for the fourth quarter and the first half of next year. We'll see if that changes over the course of this weekend and next, but certainly getting to the heart of things. And so far more good news than bad news, but I would say that the heavy lifting is in front of us.

- And, Art, thank you so much for being here. So as you say, the start to the season has been good but there's a long way to go. What do you see for the rest of the season? How much do we see in, for example, surprise upside? And then looking to Q4, how much meaningful more growth are we likely to see?

ART HOGAN: Well, I would tell you this-- I think that's a great way to frame the question, because what we have done, in large part, by having massive aggregate demand outpacing aggregate supply is likely not destroyed demand. We likely delayed demand. And I think that elongates the economic cycle into '22. So what does that mean?

It means we're going to have above mean economic growth or GDP growth in '22, higher than we're estimating right now, likely, as we start seeing some of that supply response come online. I certainly think that when we look at those companies that have to discuss things like margin degradation because of supply chain logistics and not having pricing power, you're definitely going to have that environment where you have winners and losers. And this will be the first reporting season in the post-pandemic time frame where you actually had companies that have to say, you know what? We're taking our guidance down.

We're certainly concerned about things like getting people back to work and getting the supplies of things that we need to manufacture goods. But likely, that pushes estimates for the 2022 higher, because I think that as supply chain-- logistical disruptions to the supply chain start to work themselves out, and we're starting to gradually see some sequential improvement there. I think that demand gets delayed into '22. So what we may well see is fewer companies getting higher for the fourth quarter, and that's OK.

I think fourth quarter estimates are probably still conservative. Just understand-- right now, we've got the S&P growing at a sort of 34% earnings growth rate, and we thought it was going to be 14% at the beginning of this year. We're still sort of sitting at the 14% growth rate for the fourth quarter, and that likely is conservative as well. We're just not going to see the kind of robust guide higher numbers that we saw in the first and second quarter of this year.

JARED BLIKRE: Well, I want to shift gears to the housing market. We had a little bit of time left. Housing starts, that disappointed yesterday-- I think the headline number coming in month-over-month, it was a drop of 1.6%, and then new orders also taking a 7.7% hit month-over-month. And then we're looking ahead to existing home sales, I believe, tomorrow or the next day-- what's your overall assessment here of the supply and demand characteristics that we're seeing in some of these measurements and economic stats here?

ART HOGAN: Yeah, Jared, that's such a great question. It's not a demand issue, for sure, right? We've got the largest population-- the Millennial population just getting to their peak demand for single-family homes, right? And the average new homebuyer's 33 years old. That won't peak for two years. So I think demand is going to be with us for a long time. It's just all about supply.

Existing home sales will be much more important than new home sales in the housing starts numbers. Obviously, the housing industry in general has gone through a multitude of issues with supply chain, whether it's labor or the ability to get the materials that they need to actually build houses-- so not a demand issue, supply issue. And again, I think that delays demand into '22 as a classic example of a long trend that has just gotten longer or elongated because of the fact that the homebuilders just can't keep up with the kind of demand we're seeing.

JARED BLIKRE: Yeah, the demand is simply incredible that we're tracking here. Art Hogan, thank you so much for joining us-- Chief Market Strategist at B Riley National.