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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.

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

Here is Trump economy: Slower growth, higher prices and a bigger national debt

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If Donald Trump is re-elected president of the United States in November, Americans can expect higher inflation, slower economic growth and a larger national debt, according to economists.

Trump’s economic agenda for a second term in office includes raising tariffs on imports, cutting taxes and deporting millions of undocumented migrants.

“Inflation will be the main impact” of a second Trump presidency, Bernard Yaros, lead US economist at Oxford Economics, told Al Jazeera.

“That’s ultimately the biggest risk. If Trump is president, tariffs are going up for sure. The question is how high do they go and how widespread are they,” Yaros said.

Trump has proposed imposing a 10 percent across-the-board tariff on all imported goods and levies of 60 percent or higher on Chinese imports.

During Trump’s first term in office from 2017 to 2021, his administration introduced tariff increases that at their peak affected about 10 percent of imports, mostly goods from China, Moody’s Analytics said in a report released in June.

Those levies nonetheless inflicted “measurable economic damage”, particularly to the agriculture, manufacturing and transportation sectors, according to the report.

“A tariff increase covering nearly all goods imports, as Trump recently proposed, goes far beyond any previous action,” Moody’s Analytics said in its report.

Businesses typically pass higher tariffs on to their customers, raising prices for consumers. They could also affect businesses’ decisions about how and where to invest.

“There are three main tenets of Trump’s campaign, and they all point in the same inflationary direction,” Matt Colyar, assistant director at Moody’s Analytics, told Al Jazeera.

“We didn’t even think of including retaliatory tariffs in our modelling because who knows how widespread and what form the tit-for-tat model could involve,” Colyar added.

‘Recession becomes a serious threat’

When the US opened its borders after the COVID-19 pandemic, the inflow of immigrants helped to ease labour shortages in a range of industries such as construction, manufacturing, leisure and hospitality.

The recovery of the labour market in turn helped to bring down inflation from its mid-2022 peak of 9.1 percent.

Trump has not only proposed the mass deportation of 15 million to 20 million undocumented migrants but also restricting the inflow of visa-holding migrant workers too.

That, along with a wave of retiring Baby Boomers – an estimated 10,000 of whom are exiting the workforce every day – would put pressure on wages as it did during the pandemic, a trend that only recently started to ease.

“We can assume he will throw enough sand into the gears of the immigration process so you have meaningfully less immigration, which is inflationary,” Yaros said.

Since labour costs and inflation are two important measures that the US Federal Reserve weighs when setting its benchmark interest rate, the central bank could announce further rate hikes, or at least wait longer to cut rates.

That would make recession a “serious threat once again”, according to Moody’s.

Adding to those inflationary concerns are Trump’s proposals to extend his 2017 tax cuts and further lower the corporate tax rate from 21 percent to 20 percent.

While Trump’s proposed tariff hikes would offset some lost revenue, they would not make up the shortfall entirely.

According to Moody’s, the US government would generate $1.7 trillion in revenue from Trump’s tariffs while his tax cuts would cost $3.4 trillion.

Yaros said government spending is also likely to rise as Republicans seek bigger defence budgets and Democrats push for greater social expenditures, further stoking inflation.

If President Joe Biden is re-elected, economists expect no philosophical change in his approach to import taxes. They think he will continue to use targeted tariff increases, much like the recently announced 100 percent tariffs on Chinese electric vehicles and solar panels, to help US companies compete with government-supported Chinese firms.

With Trump’s tax cuts set to expire in 2025, a second Biden term would see some of those cuts extended, but not all, Colyar said. Primarily, the tax cuts to higher earners like those making more than $400,000 a year would expire.

Although Biden has said he would hike corporate taxes from 21 percent to 28 percent, given the divided Congress, it is unlikely he would be able to push that through.

The contrasting economic visions of the two presidential candidates have created unwelcome uncertainty for businesses, Colyar said.

“Firms and investors are having a hard time staying on top of [their plans] given the two different ways the US elections could go,” Colyar said.

“In my entire tenure, geopolitical risk has never been such an important consideration as it is today,” he added.

 

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Economy

China Stainless Steel Mogul Fights to Avoid a Second Collapse

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Chinese metal tycoon Dai Guofang’s first steel empire was brought down by a government campaign to rein in market exuberance, tax evasion accusations and a spell behind bars. Two decades on, he’s once again fighting for survival.

A one-time scrap-metal collector, he built and rebuilt a fortune as China boomed. Now with the economy cooling, Dai faces a debt crisis that threatens the future of one of the world’s top stainless steel producers, Jiangsu Delong Nickel Industry Co., along with plants held by his wife and son. Its demise would send ripples through the country’s vast manufacturing sector and the embattled global nickel market.

 

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Why Trump’s re-election could hit Europe’s economy by at least €150 billion

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A Trump victory could trigger a 1% GDP hit to the eurozone economy, with Germany, Italy, and Finland most affected. Renewed NATO demands and potential cessation of US aid to Ukraine could further strain Europe.

The potential re-election of Donald Trump as US President poses a significant threat to the eurozone economy, with economists warning of a possible €150 billion hit, equivalent to about 1% of the region’s gross domestic product. This impact stems from anticipated negative trade repercussions and increased defence expenditures.

The recent attack in Butler, Pennsylvania, where former President Trump sustained an ear injury, has boosted his re-election odds. Prediction markets now place Trump’s chances of winning at 71%, a significant rise from earlier figures, while his opponent, Joe Biden, has experienced a sharp decline, with his chances dropping to 18% from a peak of 45% just two months ago.

Rising trade uncertainty and economic impact from tariffs

Economists James Moberly and Sven Jari Stehn from Goldman Sachs have raised alarms over the looming uncertainty in global trade policies, drawing parallels to the volatility experienced in 2018 and 2019. They argue that Trump’s aggressive trade stance could reignite these uncertainties.

“Trump has pledged to impose an across-the-board 10% tariff on all US imports including from Europe,” Goldman Sachs outlined in a recent note.

The economists predict that the surge in trade policy uncertainty, which previously reduced Euro area industrial production by 2% in 2018-19, could now result in a 1% decline in Euro area gross domestic product.

Germany to bear the brunt, followed by Italy

Germany, Europe’s industrial powerhouse, is expected to bear the brunt of this impact.

“We estimate that the negative effects of trade policy uncertainty are larger in Germany than elsewhere in the Euro area, reflecting its greater openness and reliance on industrial activity,” Goldman Sachs explained.

The report highlighted that Germany’s industrial sector is more vulnerable to trade disruptions compared to other major Eurozone economies such as France.

After Germany, Italy and Finland are projected to be the second and third most affected countries respectively, due to the relatively higher weight of manufacturing activity in their economies.

According to a Eurostat study published in February 2024, Germany (€157.7 billion), Italy (€67.3 billion), and Ireland (€51.6 billion) were the three largest European Union exporters to the United States in 2023.

Germany also maintained the largest trade surplus (€85.8 billion), followed by Italy (€42.1 billion).

Defence, security pressures and financial condition shifts

A Trump victory would also be likely to bring renewed defence and security pressures to Europe. Trump has consistently pushed for NATO members to meet their 2% GDP defence spending commitments. Currently, EU members spend about 1.75% of GDP on defence, necessitating an increase of 0.25% to meet the target.

Moreover, Trump has indicated that he might cease US military aid to Ukraine, compelling European nations to step in. The US currently allocates approximately €40bn annually (or 0.25% of EU GDP) for Ukrainian support. Consequently, meeting NATO’s 2% GDP defence spending requirement and offsetting the potential reduction in US military aid could cost the EU an additional 0.5% of GDP per year.

Additional economic shocks from Trump’s potential re-election include heightened US foreign demand due to tax cuts and the risk of tighter financial conditions driven by a stronger dollar.

However, Goldman Sachs believes that the benefits from a looser US fiscal policy would be marginal for the European economy, with by a mere 0.1% boost in economic activity.

“A Trump victory in the November election would likely come with significant financial market shifts,” Goldman Sachs wrote.

Reflecting on the aftermath of the 2016 election, long-term yields surged, equity prices soared, and the dollar appreciated significantly. Despite these movements, the Euro area Financial Conditions Index (FCI) only experienced a slight tightening, as a weaker euro counterbalanced higher interest rates and wider sovereign spreads.

In conclusion, Trump’s potential re-election could have far-reaching economic implications for Europe, exacerbating trade uncertainties and imposing new financial and defence burdens on the continent.

 

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