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Global companies are adjusting their full-year sales and profit expectations downward due to mounting challenges from higher interest rates and a weakening Chinese economy. These factors are impacting consumer sentiment and dampening the recent earnings growth that had buoyed investor optimism.
Several major corporations, including McDonald’s, Nissan, Tesla, Nestlé, and Diageo, have fallen short of investor expectations. Despite approximately 40% of US and European companies meeting their earnings forecasts, this has been seen as underwhelming given the strong performance of global equity markets. Brian Mulberry from Zacks Investment Management attributes these mixed results to the pressures of a prolonged high-interest rate environment on companies’ abilities to sustain earnings and revenue growth.
Looking ahead, the earnings reports from tech giants like Apple, Microsoft, Samsung Electronics, Toyota Motor, Exxon Mobil, Shell, L’Oréal, and Adidas are anticipated to offer further insights into the market’s health.
The global corporate landscape is contending with two main issues: the impact of higher interest rates on consumer spending and the economic underperformance of China. McDonald’s, for instance, reported its first sales drop in 13 quarters, largely due to China’s economic weakness. Similarly, companies such as Unilever, Visa, and Aston Martin have also highlighted difficulties in China. Analysts forecast that demand in China will remain subdued due to a prolonged property downturn and job insecurity. Stefan-Guenter Bauknecht of DWS emphasizes that Chinese consumers are hesitant to spend due to uncertainties about the future, making China the weakest major economic region.
In the US, earnings per share have risen nearly 12% from the previous year, marking the strongest quarter in the past decade, according to LSEG data. Conversely, European earnings have shown a modest 4% increase, the first positive growth rate since 2022, as reported by Bank of America Securities.
Consumer weakness across various sectors has led to reduced third-quarter growth forecasts for US companies, from 8.6% to 7.3% year-over-year, as noted by LSEG data. Bank of America analysts observe that while Q2 results were acceptable, signs of consumer stress have unsettled the market.
Companies like Nestlé and Unilever have reported first-half sales growth that fell short of expectations, leading to growing pessimism among firms in the euro zone’s largest economies. This has raised concerns about the region’s sluggish recovery. Nestlé CEO Mark Schneider acknowledged the pressure on consumers, especially those in lower-income brackets.
In the auto sector, US companies face challenges with high inventories and logistical issues, which have affected profits for Ford, Stellantis, and Nissan. Tesla’s results, in particular, disappointed investors, and the EV market appears to be slowing. LG Energy Solution, a key battery supplier for Tesla and Hyundai Motor, is expecting a 20% revenue decline due to slowing global EV demand. Similarly, China’s CATL reported a 13% drop in second-quarter revenue.
Despite the negative news, there have been positive earnings reports. Alphabet’s results have been promising for other tech giants, 3M’s shares reached a near two-year high, and General Motors, Johnson & Johnson, and JP Morgan posted strong earnings. Asian chipmakers remain optimistic about demand, fueled by the global AI boom. TSMC’s shares have surged 56% in 2024 due to growing AI demand. However, maintaining this momentum amid rising expectations will be a challenge, as evidenced by AI leader Nvidia’s recent performance.
The MSCI International index has gained 11% this year, peaking earlier this month. Investor hopes that the US Federal Reserve will begin cutting interest rates, following similar actions by other central banks, have bolstered this performance. Rick Meckler of Cherry Lane Investments suggests that as long as the expectation of lower future rates persists, analysts are unlikely to reduce overall earnings projections for next year.
