Investors brace for potential hit to earnings because of Omicron

Investors brace for potential hit to earnings because of Omicron

by Joseph Anthony
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As details of a new COVID-19 variant emerge, investors are bracing for a potential hit to US corporate earnings, particularly among retailers, restaurants and travel companies.

News of the Omicron variant comes in the middle of the holiday shopping period, and many businesses are already struggling with higher inflation and supply chain snags because of the pandemic.
That is putting the focus again on these companies affected by the reopening of the economy, said Kristina Hooper, chief global market strategist at Invesco in New York.
โ€œAre we still going to see traffic into restaurants and retailers, or at least retailers that derive most of their revenue from in-store traffic as opposed to online?โ€ she said. โ€œThe other area of vulnerability of course is supply chain disruptions.โ€
She and other strategists said itโ€™s too early to tell the extent to which the variant could affect earnings.
The Omicron variant that captured global attention in South Africa less than two weeks ago has spread to about one-third of US states, but the Delta version accounts for the majority of COVID-19 infections as cases rise nationwide, US health officials said on Sunday.
Goldman Sachs on Saturday cited risks and uncertainty around the emergence of the Omicron variant as it cut its outlook for US economic growth to 3.8 per cent for 2022. While the variant could slow economic reopening, the firm expects โ€œonly a modest dragโ€ on service spending, it said in a note.
US companies have just wrapped up a much stronger-than-expected third-quarter earnings season, and the rate of fourth-quarter earnings year-over-year growth has been expected to be well below the previous quarterโ€™s.
Analysts see fourth-quarter S&P 500 (.SPX) earnings up 21.6 per cent from the year-ago quarter, while third-quarter earnings growth was at about 43 per cent, according to IBES data from Refinitiv.
That fourth-quarter forecast has not changed since Nov. 26, just after the new variant became headline news.
Omicron may be affecting travel plans. Airline shares have already come under pressure, with the NYSE Arca airline index (.XAL) down 8.3 per cent since the close of the session before Nov. 26.
For companies, โ€œthe significance of the impact will depend on how long the Omicron measures last,โ€ said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. โ€œThere will be some short-term impactโ€ฆ Itโ€™ll surely cause some short-term disruption to travel.โ€
Colin Scarola, a vice president of equity research at CFRA, wrote in a Dec. 2 note on the airline sector that while details of the variant are still emerging, trends in US air travel over recent months with the Delta variant may give some insight into what could happen to travel under the Omicron variant.
โ€œThis recent history tells us that most people have already accepted the material risk of infection with a Covid-19 variant when fully vaccinated. But knowing that risk of severe illness remains very low, theyโ€™ve been comfortable flying on airplanes,โ€ he wrote.
Compounding concerns about the 2022 earnings outlook are higher costs for companies, with Federal Reserve Chair Jerome Powell last week signaling that inflation risks are rising and numerous companies citing rising costs during the third-quarter earnings season.
Even before the Omicron news, Tuz said investors were reading โ€œmore and more about inflation and wages and other inputs,โ€ and that was expected to continue into 2022.
โ€œI donโ€™t know if the ability to pass along these higher costs is going to exist as much,โ€ he said.
REUTERS

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