Here's what investors are betting will happen in the future to corporate America: Morning Brief
The big bet by bulled-up investors: the year ends on a very impressive note profit-wise for corporate America.
How?
Far lower commodity costs after almost three-plus years of hyperinflation.
Thank the Fed's interest rate hikes. Thank consumers not buying "stuff" and instead opting for services like Marriott vacations. Whatever the case, the line items for costs of goods sold are finally showing major relief, and the market is sniffing out what that could be in future quarters.
Take for instance oil prices, which have plunged 20% in the past year. With that comes a cascade of lower costs throughout the supply chain. Lumber prices are down 25% in the last year — great news for everyone from homebuilders such as Toll Brothers (TOL) to companies building new plants.
The cost of electricity has dropped considerably, freeing up money for consumers to spend and businesses to invest in new value-creating goods and services.
To be sure, investors are already getting a taste of how this dramatically altered cost environment could impact profits this earnings season.
P&G's CEO Jon Moeller told me late last week that, over the next 12 months, the Tide maker will save $400 million on commodity costs.
It has been three years since Moeller and I have discussed commodities prices going lower — and I talk to the guy every quarter. The change in tone around costs certainly caught my attention, hence this Monday column.
"So it's not all a bed of roses, but it's a lot better looking than it was last year at this time, and our guidance reflects that," Moeller told me on the inflation topic.
The high end of P&G's new fiscal year profit outlook was $0.06 ahead of consensus estimates.
Top execs from PepsiCo to Campbell Soup to Nucor have given me the same vibe on the cost backdrop too.
And when all is said and done, I think these deflationary forces will be the story of this particular earnings season.
Analysts forgot commodities deflation and investors are playing catch up, clearly.
FactSet data shows that 80% of S&P 500 companies have reported a positive EPS surprise so far.
Impressive — and I would argue it has been a key factor in the market's strong advance in recent weeks.
Some on the Street are finally getting it as seen in forward profit estimates.
For the fourth quarter, analysts are projecting 7.5% year-over-year earnings growth — an acceleration from a 0.2% increase in the third quarter.
Investors love profit acceleration stories.
When that story happens later this year, a better commodities backdrop will be to thank.
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email brian.sozzi@yahoofinance.com.
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