Target is unlikely to be the only company with a target during the upcoming earnings season. The retailer on Tuesday warned for the second time in less than a month that its profits would be affected by excess inventory. The new guidance comes just days after Microsoft, in another high-profile warning, said its revenue would be softer than expected due to unfavorable exchange rates. Strategists say they expect to see more companies issuing profit warnings. There will also likely be more companies short of estimates once the quarterly reports start coming out in July. “Companies are going to have to start orienting lower and more conservatively. The input costs and other issues they have are not going away yet,” said Brian Rauscher, head of global portfolio strategy at Fundstrat. “You’ve got interest rate pressures. You’re going to have the dollar. Unless you’re very clear about your visibility on your ultimate demand, it’s a very uncertain time.” In its Tuesday update, Target said profits would be squeezed by efforts to aggressively clear shelves of unwanted products. Less than a month ago, Target surprised investors with a loss of earnings and lowered its earnings forecast. Inventories at some retailers are increasing as consumer demand has shifted to different categories as Covid cases have dropped and consumers have returned to social events and other activities. Higher costs are also playing a role, especially as consumers are pressured by record high gasoline prices and rising food prices. “I think what’s happening is we’re seeing inflation starting to impact certain parts of the market in terms of their margins,” said Patrick Palfrey, senior equity strategist at Credit Suisse. “We’re seeing revenue revisions going up. Up until the last couple of weeks, earnings revisions were also going up, but at a slower pace. And now what we’re seeing is margins starting to fall.” Watched closely by investors, margins are simply the difference between the money a company brings in and what it spends. Palfrey said he expects to see a greater fork around the shores. “I imagine companies with higher margin momentum have higher operating leverage and are benefiting from underlying trends,” he said. “I think companies that have less margin momentum are susceptible to negative margins and are susceptible to a downturn in their business.” Palfrey said second-quarter earnings revisions were more negative for consumer discretionary and communications services companies. Since the start of the year, about 35% of S&P 500 companies have had positive revisions to their second-quarter results. Profit projections for index companies have increased an average of 0.3% for the second quarter since the start of the year. This contrasts with just 9% of communications services companies seeing better prospects for the second quarter. As for energy, about 86% of companies have seen second-quarter profit estimates rise by an average of 88.3% this year, according to Credit Suisse. About 50% of materials companies saw estimates rise for the quarter, by an average of 15%. Palfrey said he expects second-quarter earnings to grow by just 5.2%, less than half the 11.7% growth in the first quarter. But he sees a rebound to a 10.6% gain in the third quarter. But strategists caution that analysts are not adjusting the numbers that far down, and the stock market will react negatively to a series of warnings and errors. “I think companies will see continued pressures on margins. Companies that experience pressures on margins will be punished for that,” Palfrey said. “What it boils down to is management’s ability to navigate the current environment.” Credit Suisse ranked companies in the S&P 500 based on their margin momentum. Among those with positive momentum were companies like Chevron, Deere, Honeywell, JB Hunt and 3M. Stocks with low margin momentum relative to the S&P 500 include Walmart, Amazon, Ford, Colgate-Palmolive and Starbucks. Strategists say there are many wild cards in the economy that will affect profit prospects, including rising oil and energy prices. “The dollar represents an incremental step forward for companies, not a huge one, but nonetheless something companies will focus on, particularly for companies that lack pricing power and cannot efficiently or effectively pass on higher costs of inputs”, said Palafrém. “Energy companies and materials companies are better at passing this, but tech companies don’t have the same ability to pass.” Rauscher said he expects to see a rebound in pre-announcements next week and in July. He said he expects a large percentage of companies to continue to exceed expectations in the second quarter, but like the trend that started in the first quarter, they will also share a more negative outlook. He expects to see a deterioration in earnings as companies respond to headwinds in the economy, but it’s unclear how deep and how fast. He said that the 15% increase in the dollar is still not accounted for in the profits of many companies with sales abroad. “What does corporate America do and what do analysts do?” said Rauscher. “Is it slow bleeding or is it something that’s going to happen during the summer months where everyone wakes up and starts decreasing their numbers? That’s what I’m not sure about.” He notes that this consumer data has been mixed. “The Fed is tightening. It’s not going to improve consumer spending. … Oil is high. It seeps into a number of other things, from gas prices to energy and heating bills,” Rauscher said. “Unless oil drops $30 and we could change that dynamic, the consumer is only going in one direction – it’s flat down in my opinion.” He said that not all retailers are facing the problems that Target has, but noted that Walmart has already commented on similar problems.