While corporate earnings have so far been slightly better than feared, this is not the case for companies that conduct most of their operations overseas and are more exposed to the US-China customs battle.
These companies have seen a fantastic drop in profits of 13.6%, compared to 3.2% growth for companies that generate more than 50% of sales in the United States, according to FactSet. This picture has been getting worse – before the start of the second quarter of the earnings season, the multinational group was projected to decline by 9.3%.
Overall, S&P 500 companies are expected to see a 2.6% decline from a year ago. , Estimates FactSet, uses revenue already reported, as well as estimates for those who have yet to report. Last week, 44% of the index's companies reported revenue, and 77% beat Wall Street estimates.
However, the news has largely been rough for multinational companies trying to cope with the tiff-for-tat tariffs going on between the US and China for more than a year.
The United States has dropped customs duties on Chinese imports of $ 250 billion and is threatening to levy the remaining $ 300 billion or so on goods coming in. Delegations for both sides are meeting this week in Shanghai, although expectations are low for a major breakthrough.
In addition to the tolls on the bottom line, top line sales are hurtful. Revenues for companies that do more with their business abroad are down 2.4%, compared to a 6.4% gain for their more domestically focused counterparts.
The results increase the likelihood that corporate America is in the midst of a revenue recession. The first quarter saw a decline of 0.3%, and early projections for the third quarter saw a fall of 1
Companies have complained about tariffs while reporting revenue. About a third of all conference call leaders have cited the case as a potential headwind.
Earnings growth has been the worst in the material sector, down 18.5%. Industries are down 12.2%, while energy is down 9.8% and information technology has dropped 8.2%.
More specifically, FactSet senior analyst John Butters pointed to industry and technology as the major contributors to the multinationals' decline in earnings, while materials and energy were the largest drain on revenue. Technology, materials and energy rank first, second and fourth, respectively, in terms of the highest international income exposures.
Tariffs along with the Federal Reserve interest rate policy are "key policy issues for the high expectations of Street Street revenue," Nick Colas, co-founder of DataTrek Research, said in a note this week. FactSet estimates a strong rebound next year, with the first quarter of 2020 expected to increase revenue by 9.2% and revenues growing by 5.9%, while the second quarter tracks at 12.6% and 6.6%, respectively.
"The numbers here are too high for sure. But getting a trade agreement and a weaker greenback at least holds the possibility that S&P's revenue growth will increase again," Colas wrote. "Otherwise, it looks like 2020 will look like 2019."
However, he pointed out that a dull time for earnings does not necessarily mean bad time for stocks.
During 2014-2016, a time that included an earnings recession, stocks rose 28% as government interest rates plunged. Rates are expected to remain low, with the Fed likely to approve a cut at the policy meeting this week.
"In a declining interest rate environment, low incomes are good enough to hold stocks better," Colas said. "Yes, revenue growth could be better. Yes, it would be nice if we didn't have to rely on global central banks to see rising stock prices. But this is the world we have, so we will play the hand we were" treated. "