During the third quarter of 2021, companies responded to a mixed business environment. Challenges for some businesses included ongoing supply chain issues and higher input costs. Nonetheless, strong levels of demand, driven in part by record consumer net worth, provided an opportunity for companies to pass along these higher costs and protect their profit margins. The aggregate result was operating profit margins for the S&P 500 Index of 13.6 percent, near all-time high levels.

In some cases, management teams were able to navigate these turbulent operating conditions with ease but for others, execution was more difficult. Companies that adapted and exceeded expectations generally saw their stock prices rise. In fact, the average stock that posted better-than-expected earnings traded up about 1.6 percent the next day. However, for firms that missed earnings expectations, the stock price reaction was more dramatic, trading down 3.0 percent on average according to Bespoke Investment Group.

Supply chain issues and labor shortages

In a continuation of the trend from prior quarters, companies reported supply chain bottlenecks including component backorders and transportation challenges. Firms are also struggling with a shortage of qualified labor. Each of these issues has required companies to be nimble and creative in adapting their businesses to the current operating environment. Examples of some of the solutions implemented in response to these challenges included purchasing a ship to transport goods as opposed to relying on transportation logistics companies, installing robots to assist in food preparation and offering applicants a job within thirty minutes of their interview.

The supply chain challenges and labor shortages, combined with increasing raw material costs, have resulted in a higher cost structure for many firms. In response, many companies are using technology to boost productivity and they are becoming more efficient Companies are also raising prices which effectively passes incremental expenses on to their customers. Thus far, consumers seem willing to tolerate higher prices, possibly as a result of record consumer net worth which increased 18 percent year-over-year to a record high of $145 trillion in the third quarter of 2021.  In aggregate, high quality management teams have been able to quickly adapt to a changing and challenging business environment and protect profits for their stakeholders.

Strength of U.S. consumers

Business leaders also commented frequently on the strength of U.S. consumers. Notably, this year has been characterized by consumers returning to brick-and-mortar stores as the economy has reopened. E-commerce sales, estimated at $92 billion in November, are near a record level, but the rate of growth has declined on a year-over-year basis from the pandemic highs of about 30 percent down to about 12 percent. Overall retail sales in November were 18 percent above last year’s levels as many consumers did their holiday shopping early in anticipation of shipping delays and low inventory resulting from supply chain challenges.

The Metaverse

Finally, management teams are thinking strategically about virtual worlds that may exist in the future, frequently referenced as “The Metaverse.” Some companies are investing to position themselves as leaders in this emerging opportunity, where both consumers and businesses can create, purchase, test and experience virtual goods and services. This is an interesting trend which we are closely watching.

In summary, this earnings season tested the ability of management teams to navigate challenging operating conditions and strong levels of demand. High quality, experienced, creative leaders set themselves apart in such environments and their companies generally take market share. We will continue to monitor how companies adapt to changing market conditions.

Read more market updates.

Originally published on December 23, 2021