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Economy

Tech Stocks Are Falling. That's A Bad Sign For The Economy – TIME

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With a slew of technology companies reporting financial results this week, all eyes are on how investors will respond after a series of recent disappointing results from the biggest names in tech—including Alphabet, Microsoft, Meta, and Amazon—rattled investors about the industry’s outlook.

As tech stocks continued to take a beating this week, Wall Street analysts warn that could be bad news for the broader economy, as lackluster earnings results likely signal that inflation and high interest rates are squeezing households and businesses more than expected.

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The latest slump adds to an already disappointing year for tech stocks, which were some of the biggest winners during the early stages of the pandemic. The tech-heavy Nasdaq has lost almost 30% of its value this year, compared with the S&P 500’s 19% decline since the beginning of 2022. The Nasdaq’s tumble was hastened late last week by weak third quarter earnings from Alphabet, Microsoft, Meta, and Amazon—all industry heavyweights that financial analysts often look to when assessing the economy’s outlook.

This quarter’s earnings season will go down in the history books “as one of Big Tech’s worst” and could be a “fork in the road moment” for some of the biggest companies, wrote Wedbush Securities analyst Dan Ives in a recent research note.

“In this softer macro and a recession likely on the doorstep, Big Tech management teams needs to quickly adjust to a much different backdrop or risks losing its luster for investors that have bet on these tech thoroughbreds for the past decade,” he said.

Among big tech companies, Apple has been an outlier of late. Its shares are down nearly 16% since the start of the year, but in the last month, its stock price is up more than 7%, thanks in large part to an increase in Mac sales and growing revenue. Analysts say Apple is in better shape than its Big Tech peers since demand for its products remains high around the world, even in emerging markets, despite a decline in global sales for smartphones and PCs.

This week, analysts will turn their attention to a host of smaller tech companies, including AirBnB, eBay, Qualcomm, Paypal, Uber and Zillow, for a deeper reading of the economic forecast.

Here’s what you need to know about the tech stocks slump.

Why tech stocks are plummeting

Wall Street analysts say a number of factors are knocking the wind out of the markets, including the highest inflation in 40 years, rising interest rates, and the strong U.S. dollar—which hurts multinational companies since they earn less when converting their foreign sales into dollars.

The Federal Reserve last raised interest rates in September by 75 basis points, which means consumers will pay more for interest on vehicle financing and other loans. Analysts say the swift rise in interest rates has forced investors to rethink whether stocks that flourished in an environment with low interest rates would be able to continue to succeed in an environment with higher interest rates. The uncertainty and flurry of question marks is one reason investors are taking less risks on tech companies, which tend to perform worse when interest rates are higher and borrowing is more expensive.

Moves like these can make Wall Street anxious, as investors fear rising interest rates could make borrowing more expensive for corporations and households, thereby stifling economic growth and potentially leading to a recession.

Tech companies are also finding it more difficult to grow sales as digital advertising and other revenue streams slow. “All of these companies are to some extent dependent on advertising revenue,” says Emily Bowersock Hill, chief executive of Bowersock Capital Partners, a financial management firm. “That is a real sign of weakness in the economy that those revenues are declining,” adds Bowersock Hill, who is also chairwoman of the investment committee of the Kansas Public Employees Retirement System, a pension fund with more than $20 billion.

Microsoft, which is down 1.59% at closing on Monday, reported its weakest quarterly revenue growth in five years, throttled by rising energy costs and a slump in sales of Windows software to personal-computer makers. Sales growth in its cloud business was also lower than analysts had hoped.

Alphabet, Google’s parent company, announced that its profit dropped 27% over the previous year as advertisers spent less on marketing for insurance, loans and mortgages. The company’s revenue of $57.27 billion was also slightly lower than Wall Street expected. Its stock is down 1.85% at Monday’s close.

Meta’s stock dropped to its lowest level since 2016 on Thursday, down more than 20%, after it reported a second quarterly drop in revenue and rising costs at its money-losing metaverse division. Meta’s stock fell another 6.09% by closing on Monday.

Amazon shares plunged 7% on Friday after the company predicted weaker holiday sales than analysts had expected. The company’s cloud business also reported its slowest growth rate since 2014. Amazon fell another 0.94% by closing on Monday.

“When we’re getting these kinds of declines, it’s a clear signal that the economy is slowing down,” says Bowersock Hill. “The fact that Big Tech earnings are coming in worse than expected is a big indicator about the broader economy.”

The difficult road ahead

Despite the uncertainty around Big Tech stocks, the overall economy isn’t in terrible shape. Usually when consumers feel badly about the economy, they start to pull back on spending, which accounts for more than two-thirds of all domestic economic activity. But consumer spending expanded in the July-September quarter, and the U.S. economy returned to growth, snapping two straight quarters of economic contraction despite high inflation and interest rates.

Even so, disappointing earnings from the tech heavyweights may turn the broader market south, given the immense market value of those stocks and the industry’s tendency to foreshadow where the economy is headed. Tech stocks are particularly sensitive to inflation, rising interest rates and a strong dollar, similar to the broader economy.

“It looks like we are going to hit a recession and tech companies have to get prepared for it,” says Dr. Soudip Roy Chowdhury, CEO of Eugenie.ai, a sustainability tech company. “Some of the biggest tech companies are already slowing down hiring, some will have layoffs.”

Alphabet CEO Sundar Pichai said on the company’s earnings call that Alphabet would have to be “responsive to the economic environment,” suggesting that cost-cutting measures like layoffs are coming. Additionally, Amazon Chief Financial Officer Brian Olsavsky said that the company would be “taking actions to tighten our belts, including pausing hiring in certain businesses and winding down products and services where we believe our resources are better spent elsewhere.”

But financial analysts like Bowersock Hill don’t believe the market will see the same lows as it did earlier this summer, when investors dumped shares of everything from semiconductor companies to gadget-makers—at least not right now. “We may not actually see the full impact on earnings of rate hikes and the significant appreciation of the dollar until the fourth quarter earnings season,” she says. “We’re going to have a hard winter. I think the Big Tech earnings are just indicators of the cracks starting to appear.”

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Economy

Opinion: The future economy will suffer if Canada axes the carbon tax – The Globe and Mail

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Open this photo in gallery:

Poilievre holds a press conference regarding his “Axe the Tax” message from the roof a parking garage in St. John’s on Oct.27, 2023.Paul Daly/The Canadian Press

Kevin Yin is a contributing columnist for The Globe and Mail and an economics doctoral student at the University of California, Berkeley.

The carbon tax is the single most effective climate policy that Canada has. But the tax is also an important industrial strategy, one that bets correctly on the growing need for greener energy globally and the fact that upstart Canadian companies must rise to meet these needs.

That is why it is such a shame our leaders are sacrificing it for political gains.

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The fact that carbon taxes address a key market failure in the energy industry – polluters are not incentivized to consider the broader societal costs of their pollution – is so well understood by economists that an undergraduate could explain its merits. Experts agree on the effectiveness of the policy for reducing emissions almost as much as they agree on climate change itself.

It is not just that pollution is bad for us. That a patchwork of policies supporting clean industries is proliferating across the United States, China and the European Union means that Canada needs its own hospitable ecosystem for clean-energy companies to set up shop and eventually compete abroad. The earlier we nurture such industries, the more benefits our energy and adjacent sectors can reap down the line.

But with high fixed costs of entry and non-negligible technological hurdles, domestic clean energy is still at a significant disadvantage relative to fossil fuels.

A nuclear energy company considering a reactor project in Canada, for example, must contend with the fact that the upfront investments are enormous, and they may not pay off for years, while incumbent oil and gas firms benefit from low fixed costs, faster economies of scale and established technology.

The carbon tax cannot address these problems on its own, but it does help level the playing field by encouraging demand and capital to flow toward where we need it most. Comparable policies like green subsidies are also useful, but second-best; they weaken the government’s balance sheet and in certain cases can even make emissions worse.

Unfortunately, these arguments hold little sway for Pierre Poilievre’s Conservatives, who called for a vote of no-confidence on the dubious basis that the carbon tax is driving the cost-of-living crisis. Nor is it of much consequence to provincial leaders, who have fought the federal government hard on implementing the tax.

Not only is this attack a misleading characterization of the tax’s impact, it is also a deeply political gambit. Most expected the vote to fail. Yet by centering the next election on the carbon tax debate, Mr. Poilievre is hedging against the possibility of a new Liberal candidate, one who lacks the Trudeau baggage but still holds the line on the tax.

With the reality of inflation, a housing crisis and a general atmosphere of Trudeau-exhaustion, Mr. Poilievre has plenty of ammunition for an election campaign that does not leave our climate and our clean industries at risk. The temptation to do what is popular is ever-present in politics. Leadership is knowing when not to.

Nor are the Liberals innocent on this front. The Trudeau government deserves credit for pushing the tax through in the first place, and for structuring it as revenue-neutral. But the government’s attempt to woo Atlantic voters with the heating oil exemption has eroded its credibility and opened a vulnerable flank for Conservative attacks.

Thus, Canadian businesses are faced with the possibility of a Conservative government which has promised to eliminate the tax altogether. This kind of uncertainty is a treacherous environment for nascent companies and existing companies on the precipice of investing billions of dollars in clean tech and processes, under the expectation that demand for their fossil fuel counterparts are being kept at bay.

The tax alone is not enough; the government and opposition need to show the private sector that it can be consistent about this new policy regime long enough for these green investments to pay off. Otherwise, innovation in these much-needed technologies will remain stagnant in Canada, and markets for clean energy will be dominated by our more forward-thinking competitors.

A carbon tax is not a panacea for our climate woes, but it is central to any attempt to protect a rapidly warming planet and to develop the right businesses for that future. We can only hope that the next generation of Canadian leaders will have a little more vision.

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Economy

Business leaders say housing biggest risk to economy: KPMG survey – BNN Bloomberg

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Business leaders see the housing crisis as the biggest risk to the economy, a new survey from KPMG Canada shows.

It found 94 per cent of respondents agreed that high housing costs and a lack of supply are the top risk, and that housing should be a main focus in the upcoming federal budget. The survey questioned 534 businesses.

Housing issues are forcing businesses to boost pay to better attract talent and budget for higher labour costs, agreed 87 per cent of respondents. 

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“What we’re seeing in the survey is that the businesses are needing to pay more to enable their workers to absorb these higher costs of living,” said Caroline Charest, an economist and Montreal-based partner at KPMG.

The need to pay more not only directly affects business finances, but is also making it harder to tamp down the inflation that is keeping interest rates high, said Charest.

High housing costs and interest rates are straining households that are already struggling under high debt, she said.

“It leaves household balance sheets more vulnerable, in particular, in a period of economic slowdown. So it creates areas of vulnerability in the economy.”

Higher housing costs are themselves a big contributor to inflation, also making it harder to get the measure down to allow for lower rates ahead, she said. 

Businesses have been raising the alarm for some time. 

A report out last year from the Ontario Chamber of Commerce also emphasized how much the housing crisis is affecting how well businesses can attract talent. 

Almost 90 per cent of businesses want to see more public-private collaboration to help solve the crisis, the KPMG survey found.

“How can we work bringing all stakeholders, that being governments, not-for-profit organizations and the community and the private sector together, to find solutions to develop new models to deliver housing,” said Charest.

“That came out pretty strong from our survey of businesses.”

The federal government has been working to roll out more funding supports for other levels of government, and introduced measures like a GST rebate for rental housing construction, but it only has limited direct control on the file. 

Part of the federal funding has been to link funding to measures provinces and municipalities adopt that could help boost supply. 

The vast majority of respondents to the KPMG survey supported tax measures to make housing payments more affordable, such as making mortgage interest tax deductible, but also want to maintain the capital gains tax exemption for a primary residence.

The survey of companies was conducted in February using Sago’s Methodify online research platform. Respondents were business owners or executive-level decision makers.

About a third of the leaders are at companies with revenue over $500 million, about half have revenue between $100 million and $500 million, with the rest below. 

This report by The Canadian Press was first published March 27, 2024.

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Economy

China’s Xi meets foreign business leaders amid jitters over economy

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Taipei, Taiwan – Chinese President Xi Jinping met with American business leaders and academics at Beijing’s Great Hall of the People, state media has reported, as he tries to woo foreign investment back to China after a challenging few years for the world’s second-largest economy.

The meeting on Wednesday included Evan Greenberg, the chief executive of the US insurance company Chubb, as well as Stephen Orlins, the president of the National Committee on US-China Relations, and Craig Allen, the president of the US-China Business Council.

Like many Chinese state functions, the event was highly choreographed, with footage showing attendees arranged in a square formation offset by elaborate floral installations.

Xi last met with US executives in San Francisco following the APEC summit there in November.

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The meeting offers an opportunity for Beijing to shore up ties with US companies amid tensions with Washington and signal that their investment is welcome.

Many of the world’s top executives are already in Beijing this week for the China Development Forum, which took place on Sunday and Monday.

The forum’s guest list includes World Bank President Ajay Banga, International Monetary Fund (IMF) Managing Director Kristalina Georgieva  and representatives of more than 100 multinational firms.

While business leaders have been able to meet with many senior Chinese leaders in recent days, the invitation to meet Xi signals a concerted effort by Beijing to address negative perceptions about the current business environment.

“It’s possible that investors and executives will air some grievances at the meeting and it’s possible that lobbying might make some impact, but I don’t think that’s what this meeting is really about,” Chris Beddor, the deputy China research director at Gavekal Dragonomics, told Al Jazeera.

“This is primarily about Xi sending a message. The message is that the Chinese government is attuned to the concerns of global companies and investors, and still wants their presence in the country, at a time when global businesses are very wary of China.”

Last year, foreign direct investment in China fell by 8 percent as companies scaled back operations and sought to “de-risk” their businesses amid continuing geopolitical tensions and a tougher regulatory environment.

Tightened espionage and state secret laws have also made some firms question whether they are truly welcome, while the COVID-19 pandemic drew attention to their over-reliance on Chinese supply chains.

Still, some foreign companies have stressed their eagerness to double down on their investment.

Cook on Sunday told Chinese media that he hoped to increase Apple’s investment in China, where the company’s flagship iPhone has lost ground to local Huawei models like the Mate 60 Pro Plus.

“I think China is really opening up, and I’m so happy to be here,” Cook was quoted as saying on the sidelines of the China Development Forum.

Others, including the IMF’s Georgieva, are more jittery over China’s future.

During a speech at the China Development Forum, Georgieva told policymakers that more pro-market reforms are needed to help China’s economy rebound from the pandemic.

Despite growing 5 percent last year, China’s economy is struggling with deflation and a protracted real-estate crisis.

“China is poised to face a fork in the road – rely on the policies that have worked in the past, or update its policies for a new era of high-quality growth,” Georgieva said, suggesting that reforms could add $3.5 trillion to the economy over the next 15 years.

Shifting to consumption-focused growth, however, may be easier said than done in an economy marked by weakened domestic demand and sagging business confidence.

Chinese officials have long relied on mega infrastructure projects to boost gross domestic product (GDP), necessitating a mind shift among policymakers to move towards consumption-led growth.

Despite these concerns, China has set this year’s GDP target at 5 percent and pledged to continue its support for strategic sectors, among other goals outlined to attendees of the China Development Forum.

This year’s China Development Forum got off to a less rocky start than last year’s event, which was overshadowed by the aftermath of Beijing’s tough pandemic curbs and controversy over a Chinese spy balloon in US airspace.

“US-China tensions are a bit more stable this year, so the political pressure on American attendees has lessened somewhat,” Beddor said.

“There simply weren’t that many foreign visitors in China in March 2023. So it’s not surprising that attendance is up this year, because foreign travel of all sorts to the country is a bit more normal compared to last year,” he said.

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