This week is a big one for earnings, not just because of the big names reporting but because of the large number of earnings announcements. Investors can expect the themes of higher costs and supply chain issues to continue.

According to data from FactSet, 23% of companies in the S&P 500 have reported their third-quarter earnings and 84% of them have beat Wall Street expectations. Earnings for the S&P 500 companies are on pace to grow more than 32% in the third quarter.

Kimberly-Clark (NYSE:KMB) is down nearly 3% in premarket trading after missing on earnings estimates and lowering its remaining 2021 outlook. In a statement by the company, cost issues were perpetrated specifically by “significant inflation and supply chain” disruptions.  

Outside of the earnings news, Pinterest (NYSE:PINS) fell nearly 15% before the bell after PayPal (NASDAQ:PYPL) reported that it isn’t interesting “at this time” in acquiring the company.  PayPal is up more than 5% on the news.

Bloomberg reported this morning that whistleblower documents reveal that Facebook (NASDAQ:FB) is losing ground with teenagers and young adults. The stock was down 1% in premarket trade. Facebook is one of the S&P 500’s mega-cap tech stocks that report earnings this week. Facebook, Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), Apple (NASDAQ:APPL), and Amazon.com (NASDAQ:AMZN) have a combined market capitalization that makes up about 25% of the S&P 500. So, these earnings announcements can be market moving.  

Analysts at Citi (NYSE:C), downgraded Carnival Cruise (NYSE:CCL) to a “sell” rating. Analysts said that there was very little upside left for the company. The stock was down 1.3% in premarket trading.  

Former President Donald Trump’s new SPAC Digital World Acquisition (NASDAQ:DWAC) is up more than 12% before the open. The company that has yet to launch a product rallied 107% on Friday.

Last Week’s Sector Summary

The S&P 500 (SPX) rose nearly 2% last week, led by stocks in the Consumer Discretionary/Cyclicals and Financials sectors. The S&P Consumer Discretionary Select Sector Index ($IXY) and the S&P Financial Select Sector Index ($IXM) both returned 3%. Zacks Equity Research pointed to Netflix (NFLX) as the star among the Consumer Discretionary sector. The stock has risen more than 3.7% on the week despite falling 2.17% after announcing better-than-expected earnings on Tuesday. Netflix is up nearly 16% year-to-date.

The Real Estate and Health Care sectors were the next best performers last week. The S&P Real Estate Select Sector Index ($IXRE) and S&P Health Care Select Sector Index ($IXV) returned 2.5% over the time frame. Anthem (NYSE:ANTM) and Abbott Labs (NYSE:ABT) were among the top health care stocks after reporting better-than-expected earnings. The stocks returned more than 10% and 8% respectively for the week.

Despite rising oil prices and a lot of momentum, energy stocks were a laggard last week along with stocks in the Industrials sector. The S&P Energy Select Sector Index ($IXE) rose only 0.43%, while the S&P Industrials Select Sector Index ($IXI) was only up 0.1%. While this could just be a consolidation period for the Energy sector after being the top performer for the last three- and six-month time periods, Industrials continue to remain among the lowest-performing sectors.

CHART OF THE DAY: CHINESE DEVELOPMENTS. The Morningstar China Index ($MSCNUSDP—candlesticks) was outpacing the S&P 500 Index (SPX—pink) much of the last two years but has since slid backwards. Data source: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Comparative Shopping: The Consumer Discretionary sector can be hard to break down because it’s such a broad group with hundreds of stocks. On Thursday, Yardeni Research published its Performance 2021 S&P 500 Sectors and Industries report. When breaking down the industry groups in the Consumer Discretionary sector, the report found that specialty stores and general merchandise stores were among the top retail performers year-to-date.

In the housing and automobile groups, retail automotive, retail home improvement, and manufacturing automotive was top. The short supply of vehicles and car parts has been an ongoing story throughout 2021, and with the semiconductor shortage, it’s likely these groups will continue to struggle to meet the high demand.

Finally, the hotels, resorts, and cruise lines group started rallying back in August. If COVID-19 cases continue to fall, consumers may be ready to leave the house and take a vacation. Airlines are already reporting large increases in bookings. After nearly two years of being cooped up, travelers may be ready to get out and see more of the world.

When Bigger Is Better: While all three major indices posted gains for the week, the Dow Jones Industrial Average ($DJI) finished at a record high. The Dow is made up of only 30 blue-chip stocks. A blue-chip stock is a company that is considered a reliable investment because it’s well-established, stable, and highly recognizable.

While it could be debated which stocks in the index actually fit the blue-chip moniker, the index has benefited from some large companies reporting positive earnings. Tesla (NASDAQ:TSLA), Procter & Gamble (NYSE:PG), and American Express (NYSE:AXP) all beat analysts’ expectations this week, which helped boost performance.

So far, many Dow companies have been able to absorb the rising costs and supply chain issues. This is a benefit of being big. Conversely, small-cap companies often have less leeway when it comes to absorbing costs. If inflation continues to rise, larger companies such as the Dow components could benefit.

Strong Dollar Supporting Small Caps: The Russell 2000 (RUT) is a small-cap stock index. For nearly an entire year, the index has been oscillating in a sideways trend. Recently, strength among large- and mega-cap stocks has drawn investors’ attention. However, small-cap stocks have yet to sell-off. One reason for the strength in this group is the strong U.S. dollar.

A stronger dollar often benefits small caps because they tend to be less dependent on overseas sales. Large multinational companies usually find a strong dollar makes their products more expensive for foreign consumers, which often results in fewer sales. Since finding a bottom in June, the dollar has risen against a basket of currencies. Rising interest rates help strengthen the dollar.

Small caps are in a strange situation because the stronger dollar helps them, but interest rates are rising because of inflation and small-cap stocks have more trouble absorbing the higher costs that come with inflation. So, for this group, it’s no small predicament. 

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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