Global companies face earnings challenge

Despite matching forecasts, many companies are cutting sales outlook and leave investors disappointed

NEW YORK:

Global companies are lowering their full-year sales and profit expectations due to higher interest rates and a weakening Chinese economy, negatively impacting consumer sentiment and diminishing the luster of recent earnings growth.

Several prominent companies, including McDonald's, Nissan, Tesla, Nestle, and Diageo, have failed to meet investor expectations. Approximately 40% of US and European companies have reported earnings in line with forecasts, but this is viewed as disappointing given the strong performance of global equity markets.

Brian Mulberry of Zacks Investment Management noted the mixed results this season, attributing it to the pressures of a prolonged high-interest rate environment on companies' abilities to sustain earnings and revenue growth.

The upcoming earnings reports from tech giants like Apple, Microsoft, Samsung Electronics, Japan's Toyota Motor, Exxon Mobil, Shell, L'Oreal, and Adidas are expected to provide further insights.

Global companies are grappling with two primary issues: higher interest rates that are curbing consumer spending and China's economic underperformance.

McDonald's reported its first sales drop in 13 quarters, citing China's economic weakness. Other companies, including Unilever, Visa, and Aston Martin, have also pointed to challenges in China, with analysts predicting that demand is unlikely to recover soon due to a prolonged property downturn and job insecurity.

Stefan-Guenter Bauknecht of DWS highlighted that Chinese consumers are reluctant to spend due to future uncertainties, making China the weakest major region economically.

In the US, earnings per share have risen by nearly 12% from a year ago, marking the strongest quarter in the past decade, according to LSEG data.

In Europe, earnings are up 4%, the first positive growth rate since 2022, according to Bank of America Securities.

Consumer weakness is evident across various sectors, leading to reduced third-quarter forecasts for US companies, from 8.6% to 7.3% year-over-year growth, as per LSEG data. Bank of America analysts noted that while Q2 results were decent, signs of consumer stress have unsettled the market.

Nestle and Unilever reported first-half sales growth below expectations, and pessimism is growing among companies in the euro zone's largest economies, raising concerns about the bloc's sluggish recovery. Nestle CEO Mark Schneider acknowledged the pressure on consumers, particularly in the low-income range.

US auto companies face challenges, with high inventories and logistical issues affecting profits for Ford, Stellantis, and Nissan.

Tesla's results disappointed investors, and the EV market shows signs of slowing. LG Energy Solution, a battery supplier for Tesla and Hyundai Motor, expects a 20% revenue decline due to slowing global EV demand. Similarly, China's CATL reported a 13% drop in second-quarter revenue.

Despite some negative news, there have been positive earnings reports. Alphabet's results bode well for other tech giants, 3M's shares reached a near two-year high, and General Motors, Johnson & Johnson, and JP Morgan posted strong earnings.

Asian chipmakers are optimistic about demand, driven by the global AI boom, which has mitigated the decline in pandemic-led electronics demand. TSMC's shares have surged 56% in 2024, fuelled by the growing demand for AI functionality. However, maintaining this momentum amid rising expectations poses a challenge, as seen with AI leader Nvidia's recent performance.

The MSCI International index has gained 11% this year, peaking earlier this month. Investor hopes that the US Federal Reserve will begin cutting interest rates, following similar moves by other central banks, have contributed to this performance.

Rick Meckler of Cherry Lane Investments suggested that as long as the expectation of lower future rates persists, analysts are unlikely to reduce overall earnings projections for next year.