Now that the Q1 reporting season is almost over, it is becoming increasingly clear that the profit momentum in the two major pillars of the market – technology and retail – is declining. If this trend continues, it will not be difficult to predict that investors have seen the best of the ten-year expansion in stock markets.
Some of the largest US technology companies, including Apple Inc. (NASDAQ :), Alphabet (NASDAQ :), and Intel Corp (NASDAQ :), have been hurt by weakening demand for their products and services and cracks have emerged to appear in their future expectations.
Google & # 39; s parent alphabet published its growth since 2015, while Apple reported its first back-to-back decline in more than two years. And for & # 39; the world's largest internet vendor, Amazon (NASDAQ :), it was a mixed bag. While operating profit rose 129% to a record, sales growth slowed to 17%, well below the 30% quarterly pace that Amazon has taken on average over the past three years. The company expected 16% growth for the second quarter based on the midpoint of its forecast.
And the wider picture does not look promising either. For 15 consecutive quarters up to and including June last year, the profits of technology companies surpassed growth, with growth lagging behind by an average of 6.3 percentage points. But that lead diminishes quickly. First quarter earnings fell by more than 6%, the worst in a decade, according to Bloomberg data.
Both large companies and consumers contributed to this delay. For example, Apple is hurt by the reluctance of consumers to buy its more expensive models, while chip makers face weak demand from a range of end markets, including data centers.
The hope of recovering demand for the semiconductor industry soon declined following the escalation of the US-China trade war, raising doubts about the ability of these companies to maintain substantial growth and profit margins if both global powers failed resolution of their dispute.
The () (SOX) fell by 14% in the last month and became the biggest victim of the trade war. Apple stock has fallen by around 11% over the past month in terms of concerns that the iPhone maker could see further erosion of demand as Chinese consumers and the government reciprocate. China is Apple's third-largest market and has nearly $ 52 billion in sales within the company's last fiscal year.
Retailers are under pressure
Retail is another part of the market where companies are starting to feel the bottleneck. Kohl & # 39; s Corp (NYSE :)), JC Penney (NYSE 🙂 and Nordstrom Inc. (NYSE 🙂 all reported a drop in sales in the first quarter of this week, while Home Depot (NYSE 🙂 reported a weaker than expected increase in comparable stores.
What makes the prospects particularly grim for these companies is the impact of higher rates on their imports from China. Earlier this month, the Trump government imposed a $ 200 billion rate on Chinese merchants worth $ 200 billion, in addition to a 10% duty that was imposed in October
Kohl & # 39; s, which imports about one-fifth of its goods from China, said that additional costs associated with rising import rates have led to a reduction in the guideline for the year. The Home Depot home improvement chain estimated that it would spend about $ 1 billion more to buy goods with the 25% rates.
But the good news is that these retailers have not seen the weakness in consumer demand so far and that they may return strongly in the remainder of the year if the US-China trade war does not slow the world's largest economy. Kohl & # 39; s and Home Depot blamed cool spring weather, competitive prices and offers from competitors because revenue growth lacked their expectations.
Despite these disappointments, it was not only bad news for the retail trade. This week's disappointing earnings were in contrast with an earlier report from the big-box retailer, Walmart Inc. (NYSE: NYSE :). The company achieved comparable revenue growth in nine years, helped by an increase in traffic and by customers spending more per transaction. Online sales increased 37% compared to a year ago.
Bottom Line
A continuing tension in trade with China emerges as the greatest threat to some of the leading US listed companies. The dispute makes both companies and consumers cautious when it comes to future spending. Investors should remain cautious when making investment decisions in stocks that are closely linked to the economy, as long as the markets remain in the midst of this uncertain trading environment.
