In the WSJ article "Corporate Profit Squeeze Looms, Threatening Stocks' Climb," author Michael Wursthorn details how less than stunning corporate earning could lead to a shaky stock market. The stock market run this year has had its best returns since '98 and is up 15% from January. The article notes that the Federal Reserve's decision to pause the rate hikes for the rest of 2019 has fueled a lot of the bounce back. Alternatively, however, many large corporations like Walgreens, Apple, FedEx, and 3M have "slashed their profit forecasts for this quarter" which is not a positive signal to markets and could threaten performance. The article mentions that this is the first pullback in earnings in nearly 3 years, with "margin degradation" or the inability to produce meaningful margins as the center of the problem. A Morgan Stanley equity strategist cites that the margins have succumb to the rising costs that companies face from a "strong dollar" and hiring workers. This bit reminded me that business investment is a main driver in the economy, and without it, usually an economic slowdown is on the horizon. If workers are becoming too costly, and companies cannot afford to keep investing in human capital and paying competitive wages, then this could be a signal to the market and an upset to this year's positive returns. Moreover, this also reminded me of the market socialist ideas we have discussed in class. In our flexible labor market, where workers are laid off in downturns or less workers are hired if they are too costly, this allows companies to cut their losses and try to move forward. Alternatively, in the Yugoslavian example that we discussed in class where downsizing was not a real option, these margin concerns and expensive workers would threaten the health of the company and cause many more issues.
I am definitely curious about how the market will react to these earnings pullbacks from such large and successful corporations as well as the ways in which these companies will try to bounce back this next quarter.
2 comments:
It certainly is interesting to see how decreased earnings growth could be a predictor of future economic downturns. I find it interesting that most of this is due to decreasing margins especially when inflation remains historically low.
This is a quite interesting article. Performance is obviously about to be hindered, and it will be interesting to see how these firms react to this. Do you think more actively managed firms will start to liquidate positions while we have seen strong growth over the past few years? Nothing wrong with taking profits off of the table when you're up, and then taking those funds and reinvesting them when the market has a pullback. And if we start to see selloffs, could this be a potential catalyst for a larger pullback in the market?
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