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 In the first three weeks of October, 165 American companies have
cited the slowing global economy in their outlooks for earnings and
revenue. That is up from 108 in the same period last year, and 97 in
the year-earlier quarter, according to an analysis of earnings
reports by Thomson Reuters.
Among the phrases that have appeared in many of those statements are
“challenging macroeconomic environment,” or ”global headwinds."
Earnings and revenue have been depressed this year largely because
of the strong dollar, economic weakness in China and Brazil, and
tumbling oil and commodities prices.
The rise in the value of the American currency means that profits
earned in foreign currencies are worth less when translated into
dollars, possibly making American exports less competitive.
The weakness in major emerging markets has hit sales by U.S.
multinationals and the plunge in the prices of energy, metals and
minerals have not only hit oil producers and miners but the
manufacturing and service companies who sell to them.
The problems are clearly not across the board, as shown by
better-than-expected results reported last Thursday by technology
heavyweights Amazon.com Inc, Google-owner Alphabet Inc, and
Microsoft Corp. They are all benefiting from the expansion of
cloud-based computing.
But among the major companies to announce job cuts in recent weeks
are industrial conglomerates United Technologies Corp and General
Electric Co, technology giant Hewlett-Packard Co., and the world's
largest oilfield services provider Schlumberger
Even social media company Twitter Inc, and biotechnology group
Biogen Inc have said they are cutting jobs.
Large employers announced 205,759 U.S. job cuts in the third
quarter, the largest amount since the third quarter of 2009,
according to a report from outplacement firm Challenger, Gray &
Christmas.
Caterpillar Inc, meanwhile, told analysts that it expects its
capital spending to be “less than half of what it was in 2012,”
while appliance maker Whirlpool Corp lowered its capital spending
for 2015 to between $700 million and $750 million, down from a
previous forecast of $750 million to $800 million.
Those moves are coming at a time when overall corporate earnings in
the third quarter are on pace to fall by 2.8 percent from this time
last year. So far 59 percent of companies have reported revenues
that have fallen below analyst estimates, according to Thomson
Reuters data.
And expectations for 2016 are falling as well - in July analysts
were predicting that corporate earnings per share in the first two
quarters would grow 9.2 percent and 13.7 percent, respectively;
those figures now are down to 4.7 percent for the first quarter and
6.2 percent for the second.
The companies own forecasts, meanwhile, are falling short of
expectations at the greatest pace since June 2014, according to a
BofA Merrill Lynch Global Research report.
Companies "have a reason to be worried. This isn't a major economic
slowdown, but a meaningful one, and once you see a reduction in risk
taking you will see a reduction in growth," said Paul Hoffmeister, a
portfolio manager with the Quaker Funds.
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REBOUND POSSIBLE
Few expect the economy to go into a free-fall, of course. Should the
dollar and oil prices stabilize, the prospects for many companies
could improve quickly and their earnings and revenue could beat
expectations, setting the stage for a stock rally.
Some consumer-driven companies also continue to do well, both in the
U.S. and even in China, where both Nike Inc <NKE.N> and toy-maker
Mattel <MAT.O> have said they still see high rates of growth. Apple
Inc, which reports its quarterly results Tuesday, has said that
China remains a big part of its growth plans.
And some multinationals who have taken a pounding, such as household
products giant Procter & Gamble Co, have signaled they may be
turning a corner. P&G said it sees sales growth strengthening in the
second half of the year, as it focuses on more profitable lines such
as Pampers diapers and Tide detergent.
Many of those feeling the pinch from slowing growth overseas are the
same companies that just a few years ago were counting on China and
other emerging economies to bolster their bottom lines.
For example, International Business Machines Corp, which cut its
full-year profit forecast, said fewer big deals in China caused
revenue from that country to fall 17 percent in the third quarter.
Alan Gayle, a portfolio manager at RidgeWorth Investments, said that
he has been increasingly moving more of his equity portfolio into
U.S.-based companies that have limited exposure to China and other
emerging markets.
"I’ve pulled back from my China and emerging market exposure until
there are clearer signs that the economy has stopped slowing," he
said, adding that he expects that top-line revenue growth will
continue to be a challenge for U.S. companies there.
Yet he remains guardedly optimistic that oil and other commodity
prices are nearing a bottom, and that consumer spending in the U.S.
and Europe should remain steady. "We think the chances of a global
recession remain quite low," he said.
(Additional reporting by Lewis Krauskopf, Robin Paxton and Bill
Berkrot; Editing by Linda Stern, Martin Howell and Bernadette Baum)
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