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It is no longer news that the overall corporate profitability picture has been very strong.

While growth rates have come down already and are projected to fall further in the coming periods, the aggregate tally of total earnings remains very high. In fact, the 2021 Q3 tally reached a new all-time quarterly record, surpassing the record set in the preceding period. Other positives in the earnings picture include the breadth of strength across all the key sectors.

We also know that the unusually high growth rates of the first two quarters will not continue in the last two quarters as they largely reflected easy comparisons to the year-earlier periods that were severely impacted by Covid-related disruptions. Comparisons will be relatively normal in 2021 Q3 and beyond as the U.S. economy had started opening up in the year-earlier period and hence the expected deceleration in the growth pace.

You can see this expected growth deceleration in the below chart that puts 2021 Q4 earnings and revenue growth expectations in the context of where growth has been in the preceding four periods and the estimates for the following three quarters.

Image Source: Zacks Investment Research

The comparable picture on an annual basis is no less impressive, as you can see in the chart below.

Image Source: Zacks Investment Research

We mentioned earlier how the aggregate 2021 Q3 earnings tally represented a new all-time quarterly record. You can see that in the chart below, with this year’s four quarters highlighted.

Image Source: Zacks Investment Research

We all know that large segments of the economy, particularly in the broader leisure, travel and hospitality spaces have been held down by the pandemic, with companies in these areas still earning significantly less than they did in the pre-Covid period. In fact, many of these companies aren’t expected to get back to pre-Covid profitability levels for almost one more year.

The impressive feature of the record earnings in each of the last two quarters is that they were achieved without help from these key parts of the economy.

Clouds on the Earnings Horizon

The reality of corporate earnings is that the picture has not been this good in a very long time. The question is whether this strength continues in the coming periods or starts fading going forward?

The market appears bullish that the trend continues in the coming periods as well, but there are some worrying signs that need careful monitoring. The most important of these is the revisions trend, with the chart below offering us a sense of how estimates have evolved for 2021 Q3.

Image Source: Zacks Investment Research

What this chart shows is that the aggregate quarterly earnings estimate has been coming down, after ‘peaking’ in mid-October. In fact, the current aggregate quarterly estimate is -1% below the mid-October high point, with 11 of the 16 Zacks sectors suffering estimate cuts.

On the flip side, estimates have gone up for 5 of the 16 Zacks sectors, with the Energy sector standing out in terms of positive estimate revisions. The Autos, Finance and Technology sectors have also seen estimates go up, albeit modestly, since the quarter got underway.

Sectors suffering the biggest estimate cuts include Transportation, Consumer Discretionary, Retail, and Industrial Products.

We see here is that while the trend remains positive, it seems to have stalled out since late July. In fact, the magnitude of positive revisions to Q3 estimates is notably below what we had seen in the comparable periods of the last three earnings seasons.

This loss of momentum is likely tied to the margins outlook given rising cost trends in labor, inputs, freight/logistics, and other line items.

The trend emerging from current consensus estimates appears to show these inflationary trends as ‘transitory’ and a function of Covid-related disruptions that eventually even out. You can see this in the chart below.

Image Source: Zacks Investment Research

Net margins for the index as a whole are expected to expand 80 basis points in 2021 Q4 (12.2% vs. 11.4%), though they are expected to be below the year-earlier level for 6 of the 16 Zacks sectors. These include Consumer Staples, Utilities, Industrials, Retail, Autos and Technology.

This ‘transitory’ view of the ongoing cost pressures is even more pronounced in the annual view of the margins picture, as the chart below shows.

Image Source: Zacks Investment Research

We all know that the inflation debate has implications for Fed policy, which is as important for the market as the outlook for earnings and margins.

Earnings Reports This Week

The 2021 Q4 earnings season has gotten underway already, with results from three S&P 500 members in recent days. These three are AutoZone, Oracle, and Costco. All three of these companies reported results for their fiscal quarters ending in November, which we count as part of our December-quarter tally.

We have another five (5) index members with fiscal quarters ending in November on deck to report results this week, including FedEx (FDX - Free Report) and Darden Restaurants (DRI - Free Report).

FedEx is on track to report fiscal November-quarter results after the market’s close on Thursday, December 16^th. The company is at the core of the global supply chains for a host of industries and its outlook will give us a good read-through on the logistical challenges in the coming holiday season.

FedEx shares were down big following the last quarterly release on September 21^st when it missed EPS estimates on elevated costs. The stock has since recovered some ground, but still remains laggard, down -5.2% this year (vs. +25.3% gain for the S&P 500 index).

Darden, the operator of Olive Garden, the Capital Grille and other national restaurant chains, is on deck to report fiscal November-quarter results before the market’s open on Friday, December 17^th.

Darden is expected to earn $1.43 per share on $2.22 billion in revenues in 2021 Q4, up from 74 cents in EPS on $1.66 billion in revenues in the year-earlier quarter. The stock was up big on the last quarterly release on September 23^rd when it handily beat estimates and guided higher.

Darden shares are up +26.3% in the year-to-date period, modestly outperforming the broader market’s +25.3% gain and the Zacks Restaurant Industry’s +11.7% gain. The market will be looking for trends in margins given the ongoing pressures on the inputs and payroll front.