The Three Key Themes From Q3 Earnings
Much like the Beige Book attempts to summarize the 'economic conditions' of all the 12 regional Federal Reserve branches, so Goldman's David Kostin screens the companies in the S&P 500 for common themese from their earnings calls. This anecdotal evidence provides critical insight into the current fundamental and thematic trends. The three key findings are (1) Managements delayed capital investment and hiring and gave conservative guidance given uncertainty about the real economy and near-term policy risk from the ‘Fiscal Cliff’; (2) Companies grappled with slow global growth: stagnation in the US, recession in Europe, and an unclear path in China; and (3) Many firms took strong action to protect high margins against tepid revenue growth, rising input costs, and frugal customers. Meanwhile, a near-record percent of small businesses rank government requirements as their biggest challenge!
Theme 1: Uncertainty drives conservative planning
Managements stressed hesitancy to invest in light of both policy and growth uncertainty. A lack of clarity about the path and duration of the US recovery and the looming ‘Fiscal Cliff’ led managements to curtail capital spending and offer more conservative guidance. Consumer facing firms highlighted the risk of a possible retrenchment in sentiment if conditions deteriorate. While some managements focused on the proximate risks through year end, others argued that uncertainty is likely to persist in 2013. Several contended that a reduction in uncertainty would benefit business activity.
Selected examples: AA, BHI, C, COST, DO, DRI, EMC, GCI, GE, GPC, HON, JPM, MCD, MWV, RHI, T, and VZ.
Theme 2: Challenged global growth outlook
Most firms expect 2012’s sub-trend domestic growth will continue in 2013. Recessionary conditions in the euro area were recognized as was the long dated nature of reform, leading some firms to modify operations in the region or sharply reduce performance expectations. In contrast, views on Chinese growth were more mixed. Some firms highlighted the benefits of an orderly slowdown in growth while others raised concerns about the lack of clarity in government policy. Managements reiterated their belief in the importance of high growth markets to overall growth strategies.
Selected examples: ABT, BTU, CAT, DD, DOW, FCX, FDX, IBM, INTC, JNJ, KMB, KO, MAR, MKC, MMM, NKE, OI, OMC, OXY, SLB, TRV, UNP, and WHR.
Theme 3: Companies buttress margins near peak levels
Margins remain at historically high levels near 9%. Companies aggressively defend margins against a variety of challenges including: slow revenue growth, price conscious consumers, higher labor and input costs, and slower government spending. S&P 500 3Q 2012 revenues increased just 1% vs. 3Q 2011 and we forecast government spending will be a 150 bp drag on US GDP growth in 2013.
Selected examples: ABT, BBBY, BTU, CAG, CL, COH, DRI, FDO, FDX, GIS, HST, INTC, IR,JPM, LUV, MAR, MCD, MRK, ORCL, TRV, UNP, and WHR.
Source: Goldman Sachs