What Multinationals Are Telling Us About the Global Economy
The global economy is slowing—this is not fiction, but fact; and based on the recent market action, I sense traders and investors don’t want the current rally, which has driven the NASDAQ up 20% this year, to come to a halt. I don’t blame them, but I’m also realistic. (Read “Why an Upward Move in Stocks Isn’t Justified.”)
The eurozone is in a financial crisis that will take years to resolve. In the meantime, key trading partners, including China, Japan, the U.S., and emerging markets, will be impacted.
The global stalemate is the most obvious, with the multinational companies that source much of their revenue flow from the global marketplace.
Bellwether Caterpillar Inc. (NYSE/CAT), a global manufacturer of construction and mining equipment, is cautioning against economic slowing, especially in its key market of China. The company’s CEO Doug Oberhelman recently said, “There are a number of geopolitical and economic factors driving uncertainty in the world today, but our base case scenario calls for modest global economic growth over the next few years.” (Source: “Caterpillar Updates 2013 Targets,” Barron’s, September 24, 2012.)
Global parcel shipping company FedEx Corporation (NYSE/FDX) made a deep cut in its guidance for fiscal 2013 earnings season due to deterioration in the global economy. What makes the downward revision that much more worrisome is that it was the second time FedEx cut its earnings season guidance, and with the company being a good barometer on the global business environment, the news is a concern; in my view, it clearly points to the global GDP growth issues.
In the technology area, we are seeing many downward or cautious warnings as technology spending declines. Bellwether Intel Corporation (NASDAQ/INTC), the world’s largest maker of computer chips, cut its revenue projection for its third-quarter earnings season, citing cautious customers and dwindling demand from emerging markets. Intel said it is “seeing customers reducing inventory in the supply chain versus the normal growth in third-quarter inventory, softness in the enterprise PC market segment and slowing emerging market demand.”
In the consumer cyclical area, The Procter & Gamble Company (NYSE/PG) is an excellent barometer of global demand for daily-use consumer goods. The company said that its “core earnings” for its fiscal second-quarter earnings season, ending in September, would be soft, as sales are estimated to fall by between four and six percent year-over-year. Procter & Gamble has reduced its earnings three times over the past 12 months. Estimated sales growth for the fiscal 2013 earnings season is dismal at 0.3%, followed by three percent growth in the fiscal 2014 earnings season.
The slowing in China is affecting many U.S. companies, including The Home Depot, Inc. (NYSE/HD), which is closing seven big-box stores in China to focus on online and specialty stores.
Online travel giant priceline.com Incorporated (NASDAQ/PCLN) warned of slower growth in the third-quarter earnings season due to the situation in Europe.
Looking ahead to the third-quarter earnings season, Thomson Reuters suggests that S&P 500 companies will report their slowest annual revenue growth for the last decade with the exception of the recessionary climate in 2008–2009. Since the beginning of the third-quarter earnings season, 82 S&P 500 companies have issued negative earnings warnings.
So while the market continues to have a slightly positive bias, I would be concerned about what the companies are telling us.