United States: what should we take away from the quarterly results of large companies?

Market trends: the key points to know

To produce this article, we compared 6 large capitalizations of American companies. You will find details of their performance on the Investissons.fr website.

US stock indices S&P500 (500 most capitalized American companies) and Nasdaq (most capitalized US tech companies) fell by -25 and -30% respectively since the beginning of 2022.

While some companies like Coca-Cola or Apple are outperforming, the prices of large American companies generally follow the general trend of the stock market.

This can be explained by several notable facts.

First of all, the operational costs of large caps are increasing. With the rise in the cost of essential raw materials (for the production or transport of goods), this reduces operating margins and therefore the potential profit of these.

Furthermore, the rise in the dollar penalizes operating results outside the United States. Indeed, with a rise in the dollar index (DXI) of nearly 20% since January 2022, large companies are seeing the income from their international activities decline.

Apple and Amazon announced that they lost almost 6 and 4.6% of revenue respectively with the rise of the dollar against other national currencies.

👉 Apple’s financial results: a mixed record for the Californian giant

In addition, large companies are opting for a review of expenses (recruitment, focus on key departments) to get through the winter.

In an unpredictable economic context, American Tech giants such as Apple, Amazon, Google or Meta have jointly affirmed that the number of recruitments has been revised downwards.

They also announced that a strategic reorganization of their liquidity would be put in place from the 4th quarter of 2022 to protect against a possible future recession.

Specifically, an approach to cost reduction and revenue increase is applied by these companies to protect their business in the long term.

Finally, the last quarter of 2022 is a key period for companies. As reminded Jeff BezosCEO of Amazon and Tim Cook Apple CEO, the holiday season represents a significant portion of their annual income.

Indeed, between November 1 and December 24, households tend to over-consume to prepare for the festivities.

Despite an inflation of 10.7% in Europe and close to 8% in the United Statesthe operating results for the last quarter of 2022 will make it possible to more accurately predict the trend of the American markets for the following year.

Ultimatelythere is a decline in the attractiveness of risky assets to the benefit of value companies.

The tightening of monetary policy in the United States led to a flight of capital from risky markets (-51 and -71% for META and NFLX) towards assets that were more resilient to economic hazards.

As shown in the table above, Coca-Cola is up 2.5% year-to-date. This century-old company has certainly adapted its operational strategy by increasing its prices to combat inflation, but it has also benefited from its status as a valuable company to attract capital.

👉 Value Investing: Coca-Cola records higher results in the 3rd quarter of 2022

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The essential macroeconomic factors of the year 2022

From a macro-economic point of view, the financial markets are reacting to a geopolitical and economic situation of crisis. Key factors to consider include:

The increase in the key interest rates of the FED and the ECB. After supporting the economy to deal with the health crisis, the central banks, guarantor of economic stability in the face of a general rise in prices more commonly called inflation.

To avoid an excessive devaluation of their currency, the latter raise their key interest rates.

In theory, as long as the annual inflation growth is not contained between 1.5 and 2%the FED and the ECB will have to continue raising rates.

This will have the effect of reducing the borrowing capacity of companies necessary for the development of their activities and consequently leads to a decline in their attractiveness to investors.

Moreover, we observe a strained Chinese economic situation. On the other side of the globe, China’s economic activity is troubled by multiple crises. The Covid-19 management which is still hitting the country, has led to a significant decline in the country’s economic activity.

The disruption of the supply chain, the decline in the country’s exports and tensions around its real estate sector are weighing on the Chinese executive.

At the 20th Congress of the Communist Party of China in October, leader and president Xi Jinping fired two members of the leadership council to assert his grip on the political direction of the party.

This decision led to a historic drop in the Hong Kong stock market of more than 6% either a leak of 2.5 billion dollars in one day.

The liberal enclave of the Middle Kingdom undergoes a loss of investor confidence who fear a hardening of the country’s communist policy.

Finally, we can also observe an energy crisis and tensions between East and West.

Since February 2022, the war in Ukraine has had a profound impact on the economy. A series of economic and military measures were put in place by Europe and its allies to counter the Russian invasion.

If theeffect of its measures on the Russian economy is still uncertainthis event led to a significant increase in the cost of raw materials in the financial markets.

If other factors are also to be taken into account, several Member States of the European Union such as Germany and Italy dependent on Russian gas exports could enter recession as early as 2023.

👉 Germany on alert: the Minister of the Economy announces a recession

Finally, Sino-American tensions persist around Taipei. Indeed, the Chinese technology sector depends on American know-how, particularly in the context of production of essential semiconductors for the production of electronic products but also for the development of its military equipment.

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Our opinion on the situation

Ultimately, in 2022, the economic and geopolitical environment weighs on the financial markets. If the price of technology stocks remains negative since the beginning of the year, this retracement can represent a interesting investment opportunity for long-term investors.

For example, after respective declines in -56 and -57%the fundamentals of the two largest capitalizations of the cryptocurrency market, namely, the Bitcoin and theEther remain unchanged. The risk of including these assets in your portfolio today is therefore comparatively lower than at the beginning of the year.

However, we believe it is important to act with pharshness and to opt for an enlightened management of its capital.

As we have explained on several occasions, the application of a investment strategy programmed over several weeks is in our opinion the best method for beginners who wish to gain exposure to traditional finance or the cryptocurrency market.

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