Omicron Variant Puts Earnings At Risk

December 22, 2021

By: Wayne Duggan

Third-quarter earnings season is drawing to a close, as the S&P 500 wraps up yet another quarter of impressive growth numbers. Unfortunately, the omicron variant of COVID-19 could be a significant damper on near-term earnings moving forward at a time in which earnings growth would likely already be pressured.

Q3 Numbers
More than 95% of S&P 500 companies have already reported third-quarter earnings numbers at this point. Earnings are up 39.6% for the quarter, the third-highest earnings growth rate of any quarter since at least 2010.

Third-quarter earnings numbers have also been much better than a number of analysts had expected. In fact, 82% of S&P 500 companies have beaten consensus analyst earnings estimates for the quarter. The S&P 500 is on track to generate 44.9% earnings growth and 15.8% revenue growth for the full year in 2021. Looking ahead to 2022, analysts are expecting that growth rate to slow significantly. Analysts are calling for just 8.7% earnings growth and 7.1% revenue growth next year.

The entire U.S. economy was shut down for a large portion of 2020, making year-over-year comparisons extremely easy in 2021. Unfortunately, the new omicron variant of COVID-19 is threatening to derail the economic recovery.

The Good News
The good news for investors at this point is that anecdotal cases of the omicron variant, including the first 2 U.S. cases in California and Minnesota, appear to be mild. Medical experts are also hopeful the existing COVID-19 vaccines will prove effective against the omicron variant like they were against the delta variant and other COVID-19 mutations.

The other bit of good news is that U.S. President Joe Biden said there appears to be no need for U.S. lockdowns at this point. Biden said the omicron variant is “cause for concern, not a cause for panic.”

Unless omicron throws the medical world a curveball, it may ultimately end up spreading around the world like the delta variant did earlier this year. In the 6 months following the first confirmed U.S. cases of the delta variant in February 2021, the S&P 500 gained more than 15%.

The Bad News
The omicron variant creates even more chaos and uncertainty in a market that was already struggling with several headwinds heading into 2022. One of the biggest issues S&P 500 companies have mentioned in their third-quarter earnings reports has been supply chain disruptions. Even if the omicron doesn’t trigger broad-based global production shutdowns, there will likely be enough disruption to exacerbate supply chain issues, at least in certain industries and regions.

In addition, some industries will certainly take a direct hit from the new wave of travel bans and restrictions around the world. The hotel and leisure travel industry, including airline stocks, have sold off significantly in the past week. Oil and energy stocks also took a hit, although lower oil and gas prices may come as a relief to many Americans at the gas pump.

Finally, the S&P 500 is currently trading at a cyclically adjusted price-to-earnings ratio (CAPE) of 38.6, its highest level since the dot com bubble. Even if omicron isn’t a true threat to the global economy, it may negatively impact market sentiment and prompt some investors to take some profits off the table.

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