All the major domestic equity indexes chalked up negative numbers on Monday after warnings from Caterpillar and Nvidia added to concerns about a slowing Chinese economy and tariffs taking a bite out of corporate profits.
Shares of Caterpillar fell 9.13 percent and had their worst day since 2011 after the company’s quarterly profit widely missed Street consensus, the result of softening demand in China and higher manufacturing and freight costs. Caterpillar’s decline accounted for nearly a third of the Dow’s drop.
Nvidia fell 13.82 percent after the company reduced its fourth-quarter revenue estimate by half a billion dollars on weak demand for its gaming chips in China and lower-than-expected data center sales.
The Philadelphia semiconductor index fell 2.09 percent, while the S&P technology index was down 1.40 percent.
Also hurting global investor sentiment, China’s data indicated earnings at industrial companies shrank for a second straight month in December, hit by slowing prices and weak factory activity amid a protracted trade war with the United States.
As signs of a slowdown in the world’s second-largest economy begin to really dig in, investors hope for a compromise between Washington and Beijing on trade when officials meet on Wednesday and Thursday.
Although earnings have largely surpassed Wall Street’s expectations, helping the S&P 500 climb about 12 percent from its December lows, worries about slowing global growth have tempered expectations.
With Wall Street in the thick of quarterly results this week, 72.6 percent of companies that have already reported have exceeded profit estimates, according to IBES data from Refinitiv.
Since the reporting season began two weeks ago, analysts’ estimates for fourth-quarter profit growth have stayed steady at about 14 percent, but expectations for 2019 earnings growth have dropped to 5.6 percent from 6.3 percent.
Nine of the 11 major S&P sector indexes fell. Amazon and Microsoft were down nearly 2 percent, while Apple was down almost 1 percent, dragging down the S&P 500 and the Nasdaq. All three are set to report later this week.
The S&P energy index fell1.03 percent as oil prices fell on news of added rigs for the first time this year, a signal that crude output may rise further.
Amgen was down 3.43 percent, weighing the most on the Nasdaq Biotech index, after Evercore ISI downgraded its stock, citing heightened competition for its arthritis drug.
Approximately 7.3 billion shares changed hands on the major domestic equity exchanges, as compared to a 7.7 billion-share average over the past 20 trading days.
Tariffs Will Hurt GDP
Tariffs imposed by the Trump administration will limit growth of our real gross domestic product by an average of 0.1 percent each year for the next 10 years if they remain in place at current levels, the Congressional Budget Office (CBO) said on Monday.
The nonpartisan agency said growth of GDP – a measure national economic output – would be curbed by a drop-in consumer spending power and a fall in U.S. exports. Those declines would be only partly offset by an expected increase in output as domestic goods replace imports, the CBO said in its budget and economic outlook for 2019-2029.
The outlook for the impact of the tariffs, and retaliation from trading partners, was part of the CBO’s updated budget forecasts. The tit-for-tat tariff war with China has cost both countries billions of dollars.
Global stocks were down on Monday after data showed earnings at China’s industrial firms shrank for a second straight month in December, the latest indication of the trade war’s toll.
“Tariffs reduce economic activity primarily by reducing the purchasing power of consumers’ income as a result of higher prices and by making capital goods more expensive,” the CBO said.
Changes in trade policy both in the United States and overseas will reduce real U.S. exports by 0.5 percent by 2022, the agency said in its annual report.
Real GDP is expected to grow by 2.3 percent in 2019. That is slower than 2018’s 3.1 percent growth in real GDP but still faster than expected, the CBO said. After this year, annual growth is expected to average 1.7 percent through 2023, below the office’s projection of potential growth.
By 2022, the trade policy changes are expected to cut real consumption by 0.1 percent and real private investment by 0.3 percent, the agency said.
The longer-term impacts are particularly uncertain, the CBO said. The analysis did not consider an increase in the tariff rate from 10 percent to 25 percent on certain Chinese imports scheduled for March 2019.
The “changes in trade policy increase policy uncertainty among investors, which may further reduce U.S. output,” the report said.
Chinese Vice Premier Liu He is due to meet with U.S. Trade Representative Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin in Washington this week. The two countries are trying to resolve deep differences over China’s trade and intellectual property practices, industrial subsidies and market access to avert an increase in duties scheduled to take effect on March 2.
$1.5 Trillion Tax Cut – No Major Impact
The $1.5 trillion cut tax package appeared to have no major impact on businesses’ capital investment or hiring plans, according to a survey released a year later.
The National Association of Business Economics’ (NABE) quarterly business conditions poll published on Monday found that while some companies reported accelerating investments because of lower corporate taxes, 84 percent of respondents said they had not changed plans. That compares to 81 percent in the previous survey published in October.
The White House had predicted that the massive fiscal stimulus package, marked by the reduction in the corporate tax rate to 21 percent from 35 percent, would boost business spending and job growth. The tax cuts came into effect in January 2018.
“A large majority of respondents, 84 percent, indicate that one year after its passage, the corporate tax reform has not caused their firms to change hiring or investment plans,” said NABE President Kevin Swift.
The lower tax rates, however, had an impact in the goods producing sector, with 50 percent of respondents from that sector reporting increased investments at their companies, and 20 percent saying they redirected hiring and investments to the United States from abroad.
The NABE survey also suggested a further slowdown in business spending after moderating sharply in the third quarter of 2018. The survey’s measure of capital spending fell in January to its lowest level since July 2017. Expectations for capital spending for the next three months also weakened.
According to the survey, employment growth improved modestly in the fourth quarter of 2018 compared to the third quarter. Just over a third of respondents reported rising employment at their firms over the past three months, up from 31 percent in the October survey. The survey’s forward-looking measure of employment slipped to 25 in January from 29 in October.