In our last quarterly commentary, Brock mentioned the various factors which have injected some uncertainty into the market, namely the swiftly changing sentiment around the Delta variant, supply chain pressures, and the anticipation of monetary policy shifts. These dynamics caused some choppiness in the market in early to mid-October, with investors taking profits on what has been an extraordinary run year to date. Now, just a few weeks later, markets are back up at their all-time highs with most of these factors still unresolved in the background. As has been a recurring theme in the last year, corporate earnings have continued to outperform expectations, giving the market further confidence to continue its push higher.
So far for the 3rd quarter, well over 80% of companies in the S&P 500 have beat earnings estimates from Wall St analysts, with their combined profits over 30% higher year over year. Investments companies have made in technology, digital distribution, and optimization of costs such as real estate are continuing to offset supply chain and labor challenges that have driven costs higher. Top lines are also benefitting from the spending of savings built up over the pandemic. As a result, margins have been well protected for the vast majority of companies even as certain sectors most exposed like restaurants, hotels, and consumer goods feel the pinch. Collectively, this helped to keep stocks in check in relation to their earnings even as they trend higher.
Nevertheless, the imminent actions of the Federal Reserve represent a wildcard for the market. After nearly two years of flooding the market with liquidity, they have announced programs to start dialing back this stimulus. Inflation pressures, improving employment, and the continued growth have convinced officials that now is the time to ‘take the foot off the pedal’. While these actions will be spread out over time, and rate hikes are still a ways out, it removes a major tailwind for the market since the pandemic began. Accordingly, more pressure will be on corporate earnings to sustain the momentum.
While they have outperformed up to now, as we move out of the pandemic recovery companies are going to need to pull different levers to continue their operational success. While technology will certainly continue to help, much focus will be on getting cost pressures under control. An emerging debate is whether the current frenzy represents true demand or is exacerbated by overordering due to supply concerns. Already, GDP growth is slowing as the recovery boost moves into the rear-view mirror and excess savings are spent, which if it continues could eventually result in excess inventories. This has already happened in certain areas like lumber which sold off significantly once supply caught up. But timing is key here and much is riding on whether the logjammed logistics sector can actually get this new supply to market. So this will be a key theme to watch in the 1st half of next year.
Despite these uncertainties, we remain cautiously optimistic that these issues can gradually work themselves out and remain as vigilant as ever to add value in portfolios. Such an environment provides opportunities and you can bet that we are on the lookout for good ones.
We welcome your comments and questions, and wish you and your families well. Thank you for watching.