Commodity prices hitting 10-year highs are good if you are a producer, but they matter even if you invest elsewhere.
The most recent earnings season in the United States has been exceptional, even compared to the previous record quarter.
MSCI World Q2 earnings per share were up 6.4% quarter-on-quarter and Nasdaq 100 EPS was up 7%.
Although this is the start of Australia’s profit season, there are few signs it will be a bad season. A good indicator was Commonwealth Bank (ASX: CBA) which more than doubled its dividend.
Saxo Bank says it’s clear that GDP growth spills over into corporate profits.
Nonetheless, Saxo still warns that the next earnings season might not be so positive thanks to commodity prices, and he’s taking inspiration from one particular company.
Unilever hit by rising commodity prices
Consumer goods manufacturer Unilever (LON: ULVR) the most recent earnings are a good example of how commodity prices can have a knock-on effect.
Soaring commodity prices (even things like plastics, tea, and nuts), driven by pandemic demand and fragile supply chains, led the company to cut its operating margin forecast to the whole year.
While Unilever had already started raising prices before the announcement, it started to weaken sales in emerging markets, particularly in Brazil.
Its shares fell more than 5% on the day its results were released.
Peter Ganry, head of equity strategy at Saxo Bank, said if Unilever is one of the few companies to say it is under pressure, others might be feeling the heat. Particularly those who have hinted at supply chain disruptions, even though they are currently able to handle them.
“It could be an early warning of what’s to come,” he said.
“We believe that rising commodity prices and their potential negative impact on corporate earnings is a concern for the fourth quarter earnings season.”
Ganry’s warning came even as he admitted that revenues have fully recovered and are now well above their pre-Covid level.
“This highlights that the underlying concerns about economic growth currently weigh more than a slightly lower discount rate on cash flow,” he said.