- A new Goldman Sachs report detailed four key themes observed across second-quarter earnings calls.
- The report includes statements from 60 members of the S&P 500.
- Company executives frequently mentioned the US-China trade war, increased pressure against profits, slowing global economies, and recent interest rate cuts.
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Second-quarter earnings season is all but wrapped up, and a bevy of earnings calls detailed some commonalities across industries.
Company executives highlighted four main themes during second-quarter calls, according to a Goldman Sachs report. Commentary from 60 members of the S&P 500 focused on the US-China trade war, increased pressure on margins, global economic growth, and lowered interest rates.
Here’s what companies said on these four topics, along with some specific company examples.
1. Minimizing trade war impact
- REUTERS/Fred Dufour/Pool; Alex Wong/Getty Images
Many corporate managers noted their plans to sit back and take a more patient approach as they monitor the financial impact of upcoming tariffs. President Trump announced Tuesday he would delay a portion of the next set of duties on Chinese goods, which were previously set to hit September 1.
Some popular strategies for mitigating trade-war costs were moving manufacturing away from China, divesting from Chinese businesses, passing the costs to consumers, and boosting domestic productivity. Firms without exposure to US-China trade outperformed those caught in the conflict, Goldman analysts said.
AT&T: “It’s been a little soft in the last quarter or two with the China trade discussions. The administration doesn’t like for us to talk about that. But look, business has pulled in investment the last quarter or so as a result of the trade uncertainty.”
Juniper Networks: “We are passing along some of that tariff increase to our customers. We’ve been fairly successful at doing that, but there have been some situations where we haven’t been able to pass all the cost through, which is why we are seeing some impact to our gross margin.”
2. Greater pressure on profits
- REUTERS/Murad Sezer
Companies emphasized the tight labor market and rising commodity costs as challenges for financial growth. Average hourly earnings and the minimum wage grew throughout the second-quarter while unemployment remained low, and some managers said the rising labor costs cut into profits.
Increases in commodity costs and the stronger US dollar were also hot topics on earnings calls, particularly with companies selling abroad. Brent oil is up about 14% year-to-date as geopolitical tensions and the trade war threaten supply disruption.
Costco Wholesale: “We’re still facing pretty big headwinds from the U.S. wage increases to our hourly employees that went into effect in June of 2018 as well as additional wage increases implemented in March of 2019. Both of these wage increases negatively impacted SG&A during the quarter, representing about 10 to 12 basis points of the year-over-year variance.”
Mondelez International: “Without talking about specifics, we see some places where there is inflation, where there is some commodity and cost pressures, and we will take appropriate pricing actions as we see appropriate.”
3. Concerns around slowing economic growth
Economies are slowing around the globe, with all German bunds falling under 0%, the US seeing a dreaded yield curve inversion, and China posting its worst industrial output figures in 17 years. Though the US expansion continues its record streak, several indicators stoke new fear among investors.
Though many executives expressed concern about contracting markets, many downplayed the risk of a recession in the near future. Goldman’s CEO David Solomon recently told CNN he thinks the chance of a near-term recession is “still relatively low.”
Bank of America: “What we can see is consistent with a 2%+ growth rate versus a 3% growth rate largely due to the impacts of some of the benefits of tax reform and other things running through the economy last year. And so we feel it’s very solid. And yes, there’s a slowdown but that slowdown was predicted by everybody and now you’re seeing it evidenced.”
United Airlines Holdings: “Every time we want to use the economy as a reason why things aren’t working, you have to be very careful when you go there. You think about the tariff issues and the trade issues that we’ve all been facing, I think there is some inventory buildup that you had over prior years, that you’re having sort of resurface year-over-year.”
4. Boosted leverage from interest-rate cuts
Some companies said the Federal Reserve’s recent interest-rate cut will help them secure lower borrowing costs and more efficiently handle liabilities. Others, namely banks and real estate businesses, worried the lower rates would harm net interest income and home sales, especially as some analysts expect the central bank to issue additional cuts in the next quarter.
Goldman Sachs said August 6 they expect the Fed to issue two rate cuts in the fall, adding that the bank will stop cutting when inflation reaches a 2% level ahead of their December meeting.
JPMorgan Chase: “Obviously, the Fed will react to the data they see and I would say what’s going on is more important than just what the Fed does. If the Fed’s cutting rates and we go into recession, that’s not a good rate cut. If the Fed actually raises rates one day because we’re booming, that’s not so bad.”
Fortune Brands Home & Security: “You’ve got to balance in terms of affordability as well with lower interest rates. There is wage inflation that’s increasing, so the consumer is taking home a bit more, especially with the lower taxes. So in terms of overall affordability, those metrics look a lot better this year than they did at this time last year.”