2 years ago
Corporate America has been chalking up profits this year, but some executives are sounding deeply uncertain about the country’s economic future.
They are nowhere near as dour as Republicans about the state of the union — nor are they as pessimistic as many voters. But on public conference calls, first-quarter earnings reports and in private conversations, companies from Goldman Sachs to Tesla are voicing caution about the economy in ways that should unnerve Democrats already facing brutal midterm elections. If CEOs grow even more wary about the burgeoning set of risks, they could pull back in hiring and spending, denting the Covid-19 recovery.
Some companies are lowering their guidance to investors on future results because there are simply too many unknowns in the economy — the path of interest rates amid soaring inflation, the stability of the housing market, the recovery path for damaged supply chains, and whether the country will ever shake off the Covid hangover.
The uncertainty is reflected in stock market turbulence, where the Dow Jones Industrial Average plunged nearly 1,000 points, or close to 3 percent, last Friday, in part on softening earnings reports — only to rebound on Monday. The Dow has fallen for four weeks in a row and the Standard & Poor’s 500 Index for three straight weeks.
“Senior management is out there just as clueless as we are as to which way things are going to go,” said Jack Ablin, founding partner at investment firm Cresset Asset Management.
Some of the country’s biggest executives don’t deny it.
“Look, no one knows,” JPMorgan Chase CEO Jamie Dimon said on the bank’s recent earnings call, referring to the path of interest rates — perhaps the biggest unknown hanging over the economy. “And obviously, everyone does their forecast.”
Dimon sounded bullish at times, as have other corporate titans, reflecting the best case — one Democrats are counting on — that could materialize. “The consumer has money. They pay down credit card debt,” he said. “Confidence isn't high, but the fact that they have money, they're spending their money.”
But some of that money is drying up as the impact of federal stimulus funds fades away. That’s already showing up in slowing retail sales, which had been booming with the return of millions of Americans to the workforce.
The CEO of a Fortune 100 company that just turned in solid earnings said the economy is mostly strong now, but he’s not confident about the rest of the year.
“There is still a lot of cash in the system and there is real upward pressure on wages,” the CEO said. “But inflation is very real, and the Fed is already very late. We are going to be dealing with an economy that is not as robust. And you’ve got a lot of people dealing with inflation now who have never had to deal with it before in their lifetimes. That’s a concern.”
So can Fed policymakers — who are expected to raise interest rates at their meeting next week — deliver on their promise to slow inflation without crashing the economy or stalling hiring?
“Who knows?” the CEO said in exasperation.
On Monday, game maker Activision Blizzard, which boomed as millions of people stayed inside under quarantine, reported net game bookings of $1.5 billion — down from $2 billion at the same time last year. The shares once traded above $100 back in early 2021. Now they are at about $77.
Corporate America’s concern about the future is also reflected in polling data showing consumers losing confidence in the economy and in the ability of President Joe Biden and the Democrats to manage the nation’s finances — especially on inflation, now at a four-decade high.
That skittishness also suggests investment could sag further in the second quarter and beyond, slowing growth, limiting further employment gains and making the incumbent party’s electoral job even harder.
Uppermost in CEOs minds? The impact of higher inflation and continued disturbance in their ability to deliver their products.
Kirk Crews, chief financial officer at solar firm NextEra Energy, spoke on an April 21 earnings call of “inflationary pressures and uncertainty in the solar supply chain.” He expressed frustration that price spikes were hurting his business because his own products — solar panel systems — are meant to partly offset cost shocks like those occurring in oil, gas and other traditional sources of energy.
It’s still early in the earnings season, with about 27 percent of the companies on the S&P 500 reporting quarterly results, according to financial data company FactSet. Of those reporting, 80 percent issued a positive “surprise” in earnings per share. (A surprise is a performance that’s above or below what Wall Street analysts expected).
Still, earnings growth of 7.2 percent for the quarter thus far for S&P 500 companies would be the lowest since the fourth quarter of 2020, according to FactSet.
To date, 15 S&P 500 companies have issued guidance for the second quarter (eight negative vs. seven positive). The number issuing positive earnings forecasts could certainly rise as the remaining 73 percent of companies report, but the trend is not encouraging.
The National Association for Business Economics’ widely watched survey on business conditions, released on April 25, “reflects the smallest share of panelists reporting rising profits since October 2020.” The news is far from all bad in the NABE survey: Most businesses reported increasing sales. But expectations for higher profits in the second quarter are falling.
Some companies are crushing expectations but still sounding warnings about the economy.
Tesla on April 20 said it easily beat projections on revenue and net income with the company’s best results in years. But Tesla and CEO Elon Musk also spoke of their concern for the rest of the year.
“Our own factories have been running below capacity for several quarters as supply chain became the main limiting factor, which is likely to continue through the rest of 2022,” the company said in a statement along with its earnings report.
While the overall U.S. earnings numbers look decent so far, a good chunk of the profit gains are coming from giant energy companies capitalizing on sky-high prices.
And there have been huge misses that shook the market.
Netflix saw its stock plunge 30 percent at the open last week after the streaming video service reported a net loss of 200,000 subscribers when it had projected a gain of 2.5 million. That left analysts wondering whether other companies that soared during Covid-19 might lose some altitude as the pandemic winds down and inflation cuts into monthly budgets.
Big tech is on deck for results this week with Microsoft and Google-parent Alphabet on Tuesday, Facebook-parent Meta Platforms on Wednesday and Apple and Amazon on Thursday.
But the commentary from a group of top executives from tech to banking and construction shows concern about the rest of the year.
“While U.S. unemployment levels are low and wages are increasing, inflation is the highest it's been in decades,” David Solomon, CEO of Goldman Sachs, said on the company’s April 14 earnings call. “We're seeing new stress on supply chain and commodity prices, and U.S. households are facing rising gas prices as well as higher costs for food and housing. We've also seen an increased risk of stagflation and mixed signals on consumer confidence.”
The consumer, no longer enjoying vastly increased federal benefits, may not be able to keep things afloat much longer.
“If inflation continues to rise like this and wages don’t rise as fast, then something is going to roll over,” said Ross Mayfield, investment strategy analyst at money management firm Baird. “The consumer will not survive it.”
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