Will tariffs spoil the earnings party? Investors will get a better idea when earnings season kicks into high gear on Wall Street this week.
So far, second-quarter results have been exceptionally strong, reflecting the favourable impact of U.S. tax cuts and solid domestic and global growth. With 17 per cent of S&P 500 companies having reported, the blended year-over-year earnings-growth rate is a sizzling 20.8 per cent, according to FactSet. The figure reflects actual results for companies that have reported and analyst estimates for those that have yet to report.
This week, 174 S&P 500 companies – or about 35 per cent of all index members – are scheduled to report. Major companies on deck include include Google parent Alphabet Inc. on Monday, 3M Co. on Tuesday, Boeing Co., Coca-Cola Co., Facebook Inc., Ford Motor Co. and General Motors Co. on Wednesday, and Amazon.com Inc., McDonald’s Corp. and Starbucks Corp. on Thursday.
For some companies, tariffs are already starting to bite.
Last week, aluminum giant Alcoa Corp. said it was hit by US$15-million in tariffs in June on metal it produced in Canada and imported into the United States. As long as tariffs remain in place, the company expects a monthly hit of US$12-million to US$14-million on material imported from Canada.
Alcoa cited tariffs as one of the reasons it cut its 2018 earnings forecast – a move that contributed to a 13-per-cent decline in its stock price.
On the company’s second-quarter conference call, Alcoa president and chief executive officer Roy Harvey slammed tariffs for distorting the market, increasing costs for manufacturers and consumers and providing incentives to restart old, inefficient plants.
“In short, tariffs will not solve the challenges faced in the aluminum industry,” he said.
Also last week, General Electric Co. said it expects tariffs on its imports from China will raise its costs by up to US$400 million before it takes any steps – such as switching to suppliers in other countries – to mitigate the damage.
“We don’t see a major impact yet financially, certainly not on our 2018 guidance,” CEO John Flannery said on GE’s second-quarter conference call. But, he added, “we have a massively global business in every sense, both with the customers, supply chains, everything.”
GE’s stock also took a hit, with tariffs a likely factor, analysts said.
Some manufacturers are already planning to shift production to other jurisdictions in an attempt to blunt the impact of tariffs. Harley-Davidson Inc., which reports results on Tuesday, said in June that it will transfer production of motorcycles sold in Europe to factories overseas. The move is designed to avoid retaliatory tariffs that the European Union imposed on certain U.S-made goods in response to duties the Trump administration slapped on European steel and aluminum.
The subject of tariffs will almost certainly figure prominently in the motorcycle maker’s earnings release and conference call this week.
Another U.S. company at the centre of the tariff storm is Qualcomm Inc., which reports on Wednesday. The mobile technology provider, which gets about two-thirds of its revenue from China, has seen its US$44-billion offer for Netherlands-based NXP Semiconductors NV held up by regulatory delays in China – the only jurisdiction that has yet to approve the merger. China’s failure to greenlight the deal is widely seen as a consequence of the country’s trade fight with the United States.
Even companies that aren’t directly affected by tariffs could end up paying a price.
“There are companies that might not be significantly impacted by tariffs from a cost perspective, but from the uncertainty around it,” Kurt Brunner, a portfolio manager at Swarthmore Group in Philadelphia, told Reuters. “They could see customers holding off on spending because they don’t know what is going to happen.”
Among Canadian companies reporting this week, Canadian National Railway Co. is on deck for Tuesday, Barrick Gold Corp., Goldcorp Inc., Loblaw Cos. Ltd. and Suncor Energy Inc. report on Wednesday, Cenovus Energy Inc. and Teck Resources Ltd. follow on Thursday, and Air Canada releases results on Friday.
In addition to watching second-quarter results, analysts will also be paying attention to what companies say about the outlook for the third quarter and beyond.
Heading into this week, 11 companies in the S&P 500 have issued earnings guidance for the third quarter. Of those, nine have issued negative guidance and just two have issued positive guidance, according to FactSet.