Analysis – Global earnings so far are so good that you might feel disappointed

By Medha Singh

(Reuters) – Companies around the world are cutting their full-year sales and profit forecasts as higher interest rates and weakness in the Chinese economy drag down global consumer sentiment, dwarfing profit growth in the final quarter.

Several high-profile companies disappointed investors, including McDonald’s, carmakers Nissan and Tesla, and consumer giants Nestle and Unilever. With about 40% of U.S. and European companies reporting results, earnings were broadly in line with expectations – but after a strong run on global stock markets, “broadly in line with expectations” seems like a letdown.

“A very mixed season so far in terms of earnings,” said Brian Mulberry, a client portfolio manager at Zacks Investment Management. “We’re starting to see the pressure that a higher interest rate environment has on companies for a longer period of time and their ability to continue to drive earnings and revenue growth.”

The earnings season will be fueled this week by news from global technology giants including Apple, Microsoft and Samsung Electronics, Japan’s Toyota Motor, oil giants Exxon Mobil and Shell, and European retailers L’Oreal and Adidas.

Global companies have focused on two issues that are hurting their financial performance: higher interest rates that are curbing consumer spending and a weak economy in China, the world’s second-largest.

McDonald’s reported its first global sales decline in 13 quarters, citing weakness in the Chinese economy. Companies including Unilever, Visa and Aston Martin also reported weakness in China, with analysts warning that demand at the Asian giant is unlikely to reverse as a prolonged housing slump and job uncertainty weigh on consumers.

“The Chinese… don’t want to spend because they’re afraid of the future,” said Stefan-Guenter Bauknecht, a portfolio manager at DWS. Until growth improves in China, the country will be “the weakest of the big regions, or at least the one that lags the most,” he said.

Earnings per share rose nearly 12% in the U.S. so far from a year ago, the strongest quarter in the past 10, according to LSEG data. Earnings rose 4% in Europe, according to Bank of America Securities, slightly above market expectations and the first positive growth rate for Europe since 2022.

Consumer weakness is being signaled across all industry sectors, and cuts to forecasts have increased, the brokerage said. U.S. companies lowered their third-quarter forecasts to 7.3% year-on-year growth on Friday from 8.6% in early July, according to LSEG data.

“While second-quarter results were generally decent, the season spooked the market with signs of consumer stress,” Bank of America analysts said in a research note.

Nestle and Unilever reported below-expected sales growth in the first half of the year, as companies in the eurozone’s two largest economies have become increasingly pessimistic, raising concerns about the bloc’s slow recovery.

“There is a value-seeking behavior among consumers. There is pressure, especially in the low-income group,” Nestle CEO Mark Schneider told reporters.

Car companies are struggling in the United States, where high inventories and logistics problems are hurting profits at Ford Motor, Stellantis and Nissan. EV leader Tesla disappointed investors with its results, and many still believe the company is overvalued, with EV sales declining.

EV battery maker LG Energy Solution, which supplies Tesla and Hyundai Motor, is forecasting revenue will fall more than 20% this year due to a sharper-than-expected slowdown in global demand for electric vehicles. Its larger rival, China’s CATL, reported a 13% drop in revenue in the second quarter.

TOKEN EXCHANGE

The earnings news wasn’t all bad. The surge in cloud-computing revenue from Google parent Alphabet bodes well for other tech barometers later this week. Results from industrial conglomerate 3M pushed its shares to a near two-year high, while automaker General Motors and pharmaceutical giant Johnson & Johnson reported strong gains and banking giant JP Morgan reported a record profit.

Asian chipmakers have become more optimistic about demand forecasts, benefiting from a global artificial intelligence boom that has helped them weather a pandemic-induced slump in electronics demand.

“AI is so hot; now everyone, all my customers, want to put AI functionality into their devices,” TSMC chairman and CEO CC Wei said at an earnings conference, adding that demand for AI is more real now than it was two or three years ago. TSMC shares are up 56% so far in 2024.

Despite the optimistic outlook, shares of major Asian chipmakers are under pressure to keep up with rising expectations. That’s also evident in the performance of AI leader Nvidia, which soared to more than $3 trillion earlier this year before collapsing in the summer.

“Investors’ expectations are so high that it is difficult to meet them, and in the short term the stock price may not rise that much,” said analyst Lee Min-hee of BNK Investment & Securities.

The broad MSCI International market index has risen 11% this year, hitting a peak earlier this month before selling off, partly on hopes the U.S. Federal Reserve would start cutting interest rates after similar moves by other central banks.

“If lower interest rates remain the popular view, analysts are unlikely to lower their overall earnings forecasts for next year,” said Rick Meckler, partner at Cherry Lane Investments.

(Reporting by Medha Singh in Bengaluru; additional reporting by Linda Pasquini in Gdansk and Samuel Indyk in London and Shivansh Tiwary, Nathan Gomes, Manya Saini, Granth Vanaik, Mrinalika Roy, Manas Mishra, Aditya Soni in Bengaluru; Heekyong Yang and Joyce Lee in Seoul, Daniel Leussink in Tokyo; writing by David Gaffen and Matt Scuffham; editing by Miyoung Kim and Shri Navaratnam)