Corporate America frets over rising toll from China trade war
Corporate executives in the US are growing increasingly nervous that the trade spat with China will dent their companies’ profits.
As second-quarter earnings season comes to a close, about half of the 102 companies that have mentioned Chinese growth trends on earnings calls did so in a negative context, which represents a steep rise from less than a third in the first quarter, according to a Bank of America Merrill Lynch analysis. About 70 per cent of the companies that mentioned tariffs specifically were negative, up from 50 per cent last quarter.
The fading sentiment comes as the world’s two largest economies prolong their stand-off over trade, denting investor confidence that US-listed companies exposed to China will be spared.
“With re-escalation of trade tensions, more companies have cited negative trends in China compared to last quarter,” said Savita Subramanian, equity and quant strategist at BofA in New York. “Negative mentions were concentrated in cyclical sectors, such as industrials, tech and materials.”
Markets have whipsawed on the shifting outlook for trade negotiations this year and sold off heavily this month after US president Donald Trump declared that America would impose a 10 per cent levy on a further $300bn of Chinese goods. The announcement contributed to the worst day of the year for US stocks, which lost 3 per cent on Monday last week.
The worsening outlook comes as US corporate profit growth has slowed. Second-quarter earnings per share are on pace to grow just 0.6 per cent from the same period a year ago, according to BofA. This figure means that the biggest listed companies have narrowly averted an “earnings recession” — defined as two consecutive quarters of shrinking earnings per share — after a mild dip in the first quarter.
The trade war is also weighing on corporate spending. Growth in capital expenditure has steadied at 3 per cent in the first and second quarters, according to BofA’s figures. That marks a steep drop from the 11 per cent rate seen at the same point last year, which was boosted in part by the effects of corporate tax cuts.
“With no trade truce in sight and macro data continuing to surprise to the downside, the uncertainty overhang may continue to impact business spending,” Ms Subramanian said.
Investors will be paying close attention to the drop in capex, which is used as a rough indication of future profits, said David Joy, chief market strategist for Ameriprise Financial in Boston.
“It’s hard to make meaningful decisions about capital spending if you don’t know where you should be making investments — that has had a huge impact on capital spending in the second quarter,” Mr Joy said.