Forget banks—third-quarter earnings season doesn’t start until Wednesday, when Netflix and Tesla report.
Since Alcoa’s (ticker: AA) abdication, the kickoff of earnings season has been assigned to the U.S.’s big banks, including JPMorgan Chase (JPM) and Citigroup (C), which reported earnings on Friday. This despite the fact that some large, prominent companies, including PepsiCo (PEP) and Delta Air Lines (DAL), disclosed their results earlier in the week.
Don’t expect the overall market to care too much about how the banks do. The S&P 500 financials sector, which includes banks and insurers but also Visa (V) and Mastercard (MA), totals 12.7% of the index’s market value. Its earnings contribution is expected to be larger, at 17.4% of third-quarter earnings, according to data from Refinitiv. But these days, the banks are less a reflection of the U.S. economy than they are of monetary and regulatory policy, which take up a good portion of their earnings calls.
No, earnings season doesn’t really get started until Wednesday, when the first of the large technology-oriented stocks that have driven the S&P 500 this year are set to report. That would be Tesla (TSLA) and Netflix (NFLX), followed by Alphabet (GOOGL), Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN) next week, and then Apple (AAPL) on Nov. 2. Nvidia’s (NVDA) fiscal third quarter doesn’t end until Oct. 31, and it will report in late November.
The Magnificent Eight punch well above their fundamental weight, thanks to premium valuation multiples. The group makes up roughly 30% of the S&P 500’s market capitalisation but is expected to contribute just 10% of the index’s third-quarter sales and 16% of earnings, according to Refinitiv. Hits and misses from their results will prompt outsize moves in the index.
Take Meta, which Wall Street analysts expect to report $8.0 billion in earnings for the third quarter, up 120% from the same period last year. That’s nearly a full percentage-point contribution to the S&P 500’s overall expected earnings growth in the quarter.
Nvidia is responsible for another 1.5 percentage point of expected growth, Amazon for 0.6 point, and Alphabet and Microsoft for 0.5 point each. With growth rates like those, how well the biggest companies on the market do could meaningfully swing overall S&P 500’s earnings growth one way or another.
There’s a slim margin for error: Analysts are predicting 1.3% year-over-year earnings growth from the S&P 500 in the third quarter, per Refinitiv. The biggest expected individual detractors from the index’s year-over-year earnings growth are Exxon Mobil (XOM)—a 1.9-percentage-point drag—and Pfizer (PFE), a 1.5-point drag.
That’s before considering the potential impact to investor sentiment from Big Tech’s results. In a year dominated by macro themes, the enthusiasm around artificial intelligence has been one of the greatest bullish drivers of the stock market. Nvidia’s results are showing the benefit already, while other companies are more likely to be merely talking up the technology’s transformative potential.
Hype can only go so far—eventually even Microsoft, Meta, and Alphabet will need to show that their AI investments are yielding a positive return. The third quarter of 2023 is still early innings in the AI revolution, but signs of progress will be cheered by investors, and may be necessary to justify many of the Magnificent Eight’s huge rallies this year.
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Multinationals like Starbucks and Marriott are taking a hard look at their Chinese operations—and tempering their outlooks.
For years, global companies showcased their Chinese operations as a source of robust growth. A burgeoning middle class, a stream of people moving to cities, and the creation of new services to cater to them—along with the promise of the further opening of the world’s second-largest economy—drew companies eager to tap into the action.
Then Covid hit, isolating China from much of the world. Chinese leader Xi Jinping tightened control of the economy, and U.S.-China relations hit a nadir. After decades of rapid growth, China’s economy is stuck in a rut, with increasing concerns about what will drive the next phase of its growth.
Though Chinese officials have acknowledged the sputtering economy, they have been reluctant to take more than incremental steps to reverse the trend. Making matters worse, government crackdowns on internet companies and measures to burst the country’s property bubble left households and businesses scarred.
Lowered Expectations
Now, multinational companies are taking a hard look at their Chinese operations and tempering their outlooks. Marriott International narrowed its global revenue per available room growth rate to 3% to 4%, citing continued weakness in China and expectations that demand could weaken further in the third quarter. Paris-based Kering , home to brands Gucci and Saint Laurent, posted a 22% decline in sales in the Asia-Pacific region, excluding Japan, in the first half amid weaker demand in Greater China, which includes Hong Kong and Macau.
Pricing pressure and deflation were common themes in quarterly results. Starbucks , which helped build a coffee culture in China over the past 25 years, described it as one of its most notable international challenges as it posted a 14% decline in sales from that business. As Chinese consumers reconsidered whether to spend money on Starbucks lattes, competitors such as Luckin Coffee increased pressure on the Seattle company. Starbucks executives said in their quarterly earnings call that “unprecedented store expansion” by rivals and a price war hurt profits and caused “significant disruptions” to the operating environment.
Executive anxiety extends beyond consumer companies. Elevator maker Otis Worldwide saw new-equipment orders in China fall by double digits in the second quarter, forcing it to cut its outlook for growth out of Asia. CEO Judy Marks told analysts on a quarterly earnings call that prices in China were down roughly 10% year over year, and she doesn’t see the pricing pressure abating. The company is turning to productivity improvements and cost cutting to blunt the hit.
Add in the uncertainty created by deteriorating U.S.-China relations, and many investors are steering clear. The iShares MSCI China exchange-traded fund has lost half its value since March 2021. Recovery attempts have been short-lived. undefined undefined And now some of those concerns are creeping into the U.S. market. “A decade ago China exposure [for a global company] was a way to add revenue growth to our portfolio,” says Margaret Vitrano, co-manager of large-cap growth strategies at ClearBridge Investments in New York. Today, she notes, “we now want to manage the risk of the China exposure.”
Vitrano expects improvement in 2025, but cautions it will be slow. Uncertainty over who will win the U.S. presidential election and the prospect of higher tariffs pose additional risks for global companies.
Behind the Malaise
For now, China is inching along at roughly 5% economic growth—down from a peak of 14% in 2007 and an average of about 8% in the 10 years before the pandemic. Chinese consumers hit by job losses and continued declines in property values are rethinking spending habits. Businesses worried about policy uncertainty are reluctant to invest and hire.
The trouble goes beyond frugal consumers. Xi is changing the economy’s growth model, relying less on the infrastructure and real estate market that fueled earlier growth. That means investing aggressively in manufacturing and exports as China looks to become more self-reliant and guard against geopolitical tensions.
The shift is hurting western multinationals, with deflationary forces amid burgeoning production capacity. “We have seen the investment community mark down expectations for these companies because they will have to change tack with lower-cost products and services,” says Joseph Quinlan, head of market strategy for the chief investment office at Merrill and Bank of America Private Bank.
Another challenge for multinationals outside of China is stiffened competition as Chinese companies innovate and expand—often with the backing of the government. Local rivals are upping the ante across sectors by building on their knowledge of local consumer preferences and the ability to produce higher-quality products.
Some global multinationals are having a hard time keeping up with homegrown innovation. Auto makers including General Motors have seen sales tumble and struggled to turn profitable as Chinese car shoppers increasingly opt for electric vehicles from BYD or NIO that are similar in price to internal-combustion-engine cars from foreign auto makers.
“China’s electric-vehicle makers have by leaps and bounds surpassed the capabilities of foreign brands who have a tie to the profit pool of internal combustible engines that they don’t want to disrupt,” says Christine Phillpotts, a fund manager for Ariel Investments’ emerging markets strategies.
Chinese companies are often faster than global rivals to market with new products or tweaks. “The cycle can be half of what it is for a global multinational with subsidiaries that need to check with headquarters, do an analysis, and then refresh,” Phillpotts says.
For many companies and investors, next year remains a question mark. Ashland CEO Guillermo Novo said in an August call with analysts that the chemical company was seeing a “big change” in China, with activity slowing and competition on pricing becoming more aggressive. The company, he said, was still trying to grasp the repercussions as it has created uncertainty in its 2025 outlook.
Sticking Around
Few companies are giving up. Executives at big global consumer and retail companies show no signs of reducing investment, with most still describing China as a long-term growth market, says Dana Telsey, CEO of Telsey Advisory Group.
Starbucks executives described the long-term opportunity as “significant,” with higher growth and margin opportunities in the future as China’s population continues to move from rural to suburban areas. But they also noted that their approach is evolving and they are in the early stages of exploring strategic partnerships.
Walmart sold its stake in August in Chinese e-commerce giant JD.com for $3.6 billion after an eight-year noncompete agreement expired. Analysts expect it to pump the money into its own Sam’s Club and Walmart China operation, which have benefited from the trend toward trading down in China.
“The story isn’t over for the global companies,” Phillpotts says. “It just means the effort and investment will be greater to compete.”
Corrections & Amplifications
Joseph Quinlan is head of market strategy for the chief investment office at Merrill and Bank of America Private Bank. An earlier version of this article incorrectly used his old title.