today is the traditional start of thirdquarter earnings heres the good news business is good demand for most goods and services are high heres the bad news supply chain issues labor shortages and higher energy prices are making this a very difficult quarter to model this could be a rough quarter peter tchir head of macro strategy at academy securities told me there is a real concern that if inflation runs hot it will suck away some of the ability of consumers to spend even with what looks like stronger demand while today is the traditional start of earnings season because big banks like jpmorgan report there are 22 companies that have already reported earnings some of them with quarters that end in august analysts and strategists watch these reports carefully because they are a good early warning indicator for earnings in the third quarter that has just ended as well as fourthquarter guidance 1 the early reporters are not beating estimates the way they once did the 22 companies that are early reporters are beating estimates by 11 according to nick raichceo of the earnings scout while this is above the traditional beat of 3 to 5 it is far below the average beats of prior quarters this year including the roughly 18 beat for the second quarter 2 those early reporters are not providing guidance that is as strong as last quarter as a result analysts are not raising estimates as aggressively as they were in prior quarters the positive estimate revision of 2021 has slowed dramatically because of rising inflation and supply chain issues raich told me companies are not nearly as positive as they were three to six months ago as a result earnings growth which has been rising for the past several quarters is now showing signs of peaking thirdquarter estimates for example have been rising steadily for months but have stopped in the last few weeks july 1 up 247 oct 1 up 294 oct 8 up 296 source refinitiv the bullish outlook the market is already adjusting this is going to be choppy but some of it has already been broadcast by the broader market tony dwyer chief market strategist at canaccord genuity told me he noted that financials industrials materials and energy which are all cyclicals underperformed all summer it was a summer of indigestion and the markets were telegraphing it was going to be a difficult earnings season dwyer said we are now entering a midcycle phase of the economic recovery during this period earnings growth peaks priceearnings ratios decline and the big market gains during the earlycycle phase become modest gains or even reversals this has happened the forward multiple on the sp 500 has gone from roughly 23 to 20 and the sp 500 is 4 off its high of six weeks ago the average stock particularly in the cyclical sectors have already reacted to the transition from early cycle to midcycle he told me if we are consistent with prior transition phases you want to buy weakness dwyer told me how do you model supply chain disruptions others are concerned that these disruptions will last much longer than anticipating outstripping the strong demand we are currently seeing the poster child for this quarters earnings quagmire is nike which reported earnings sept 23 while earnings were slightly better than expected revenues disappointed the company said that supply chain problems including 10 weeks lost production in vietnam where 40 of their sneakers are made along with elevated times to ship product significantly affected the companys ability to deliver goods at the same time the company said demand was outstanding including a record backtoschool season in north america while nikes stock price dropped about 6 when the report came out it has since recovered most of its losses as investors have chosen to believe that strong demand is more important than temporary supply chain disruptions the worry among investors is that supply chain disruption and higher cost will become the standard refrain for most companies in the third and fourth quarter what if for example apple pulls a nike and says they cannot deliver enough iphones even though demand is strong thats what bloomberg news was reporting last night saying that the company was likely to cut iphone 13 production targets for 2021 due to chip shortages theres an assumption that apple would have figured a way around this so a confirmation of that would definitely be a negative for markets peter tchir told me tony dwyer however insists even that announcement wont have a longterm impact who on the planet hasnt heard there is a semiconductor crunch a supply chain issue and labor shortages he asked the question isnt how long is it going to last the question is when is it going to be discounted