Kristian Rouz – While the cheap oil, a stronger dollar, weak international demand, and the recent turmoil on Wall Street have all been part of the greater picture of the declining economic power of the US corporate sector, the 2015 results also signaled a rebalancing in structure and profitability of America’s big business.
Yet, the overall earnings season is still expected to be bleak, while macroeconomic fundamentals are rather a frustration, indicating the readjustment of the US big business might turn out to be a lengthier process, with corporations still vulnerable facing global and domestic challenges.
Corporate earnings reports for Q4 2015 reflect the two major trends likely to persist in the American big business throughout this year.
The tech giant Alphabet, which owns Google among other assets, posted a solid rally on Wall Street despite all the volatility and the recent bloodbath in stocks, pushing the tech sector higher, as investors are anticipating a further increase in Alphabet’s earnings and improvements in its overall commercial performance.
Meanwhile, the energy sector is dipping dramatically. Besides the small caps shale oil carnage on Wall Street, having climaxed in December’s Third Avenue crash and a subsequent capital evaporation, big oil is feverish as well. Exxon Mobile and Chevron took a massive hit, with the latter’s Q4 performance being a sheer loss, the first in over 13 years.
Big oil earnings dropped amidst the decline in oil prices, yet, the tougher competition in the small cap environment played its role. Subsequently, the entire energy sector found itself on the skids, and while big oil seems more sustainable, the small cap flexibility in terms of quicker idling and recommissioning oil derricks ad hoc might eventually prove a better longer-run competitive advantage.
The gains in the tech sector are best explained by the overall situation in the US economy. While the corporate sector struggles in general, households are doing way better, bolstered by advances in effective wages, a ‘full employment’ job market environment and lack of inflation.
The tech sector alone is heavily reliant on domestic consumption, and while consumer spending grew throughout 2015 at its fastest pace in ten years, business projects demanding large fixed-asset investment are quite unprofitable, as evidenced by non-residential private sector investment, gaining at its slowest since 2010. Tech corporations do not usually rely on significant fixed-asset investment, and their profitability directly depends on how much consumers can afford to spend.
“We still have a fairly solid picture in terms of domestic demand, which is mostly consumer spending, housing, and fixed investment that’s not related to energy, which is doing OK," Nariman Behravesh of the Lexington, MA-based IHS Inc. said. "Those are the sources of strength in the US and that’s close to 90 percent of the US economy.”
Amidst the optimistic sentiment, however, serious concerns over the US international economic performance persist. A stronger dollar resulted in 0.2-0.5% declines in US foreign trade in Q4. Imported goods are cheaper for US consumers, meaning the domestic production is taking a hit as well. Meanwhile, investment in energy dropped 35% in 2015, the greatest since the 1986 ‘oil bust’.
After all, although the tech industry is hardly 7.1% of the US GDP and its robust growth amidst either the slowdown or a halt in other sectors is obviously not enough to drive the entire economy, a recession prospect seems hardly viable in the short-to-mid-term.
Yet, it would take a more consistent policy response from the Federal Reserve to fix the lingering private sector issues, as government spending alone is also insufficient to drive any substantial economic expansion.