The Global Supply Chain and Its Impact on Earnings

Here at Commonwealth, we’ve spent a lot of time breaking down earnings results and commentary in the past few months and after the third quarter ended. For the most part, business for corporate America is strong, and the post-pandemic rebound continues with a few disruptions related to the spread of new variants. But the most common theme we’ve heard discussed in the calls we’ve participated in relates to the supply chain and the negative impact it is having on earnings and how it could continue well into 2022. And it’s not just us. According to FactSet, 342 of the S&P 500 companies made some sort of reference to the supply chain in their quarterly earnings calls. That is at a 10-year high, and it highlights how much of an issue this has become in creating bottlenecks for the economy and corporate earnings. The supply chain is critical, as it can result in demand destruction as consumers choose not to wait around to make a purchase. It can also result in higher costs. Both of these factors put and likely will continue to put downward pressure on earnings in the near term.

Bottlenecks Easing?

More recently, we have heard that some of these bottlenecks in the supply chain are easing ever so modestly. Several large auto manufacturers have indicated that they are now able to increase production thanks to that easing. Semiconductor availability is also improving, with lead times across the industry showing signs of decline. Outside of a select few high-demand products, retailers claim to be in good shape with inventory for the holiday season. While those anecdotes are encouraging, we also like to look to the data for confirmation. There are a variety of different ways to do so, but there are a few key factors we focus on more than others.

Port congestion. The first has to do with the number of ships that are waiting to gain entry into the U.S. ports where most of the supply chain constraints exist. According to a recent report from Wells Fargo, the seven-day moving average count of ships anchored at the L.A./Long Beach ports dropped to a low of just under 50 vessels from a high of more than 80 just a few weeks back. On its surface, that is a huge improvement and a very encouraging sign that bottlenecks are easing. But there are some differences in the data based on how a ship’s status is classified. Another report from American Shipper that accounts for ships that are not technically anchored but are “loitering or steaming offshore” bounces the full count all the way up to 90 boats. So, while there are some indications of improvement, the data remains mixed.

Shipping costs. Another indicator that we watch to gauge how tight the supply chain looks is the price that shippers are charging for the transport of single containers. This price immediately captures the status of supply and demand. The higher price can mean both more activity and a lack of demand due to port congestion. The Freightos Baltic Index measuring global container costs peaked back in September at about $11,100 right around the end of the third quarter. Rates then slipped to as low as $9,202 back in mid-November, which would indicate that the tightness in the supply chain was starting to ease. But in the past several weeks, prices have moved higher and now sit at $9,550. So, pricing has definitely eased from the peaks this fall, but it is still well above the $3,450 rate from the start of 2021.

The Good News

While companies spent a lot of time discussing tightness in the supply chain and the negative impact that might have on earnings over the next several quarters, the good news is that we are starting to see some signs of improvement. With port congestion easing and shipping costs moderating to some degree, the worst of the supply chain issues may very well be behind us. If that is the case, then it should at least provide some degree of stabilization in the near term.

There are still a lot of moving parts around a supply chain that is still struggling mightily to get its feet under it as we recover from what was hopefully the peaks of this pandemic back in late 2020 and early 2021. As we have seen in the past several quarters, if there are any breakdowns in this nascent recovery, including shutdowns related to new COVID strains, it could have negative ripple effects across the globe.