Second-quarter gross domestic product fell 33% (on an annualized basis) according to the Commerce Department. It took years for the United States to claw its way out of the last economic recession in 2008. With key second-quarter data points coming in, what do earnings at financial and tech companies suggest about the future economic landscape?
Let’s first take a look at the fallout of the coronavirus issue and its economic impact at US financial companies. Lenders set aside significant amounts for credit loss provisions in the second quarter (April, May and June). These credit loss provisions are put away in the expectation that more people and corporations will go delinquent on payments in the coming months and years.
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JPMorgan, Citigroup and Wells Fargo, as major consumer/commercial lenders, each set aside billions of dollars. JP Morgan is the lending powerhouse in the US when measured by assets. It wrote off $4.6 billion in the second quarter to shore up its balance sheet against future losses. Consequently, second-quarter earnings per share were down 51%.
Trading and investment banking activities actually increased during recent volatility. Investment banks like Goldman Sachs benefitted. Goldman’s total revenues were up from to $12.3 billion from $8.4 billion in the second quarter. Goldman’s market making revenues rose to $5.8 billion from $2.4 billion last year. Investment banking revenues went up to $2.7 billion from $1.7 billion. (Investment banking revenues increased as Goldman helped other companies shore up their balance sheet with equity or debt issuances, whereas merger and acquisition activity was weak in the second quarter.)
This revenue increase at Goldman Sachs was partially offset by a $1.6 billion provision for future credit losses. All in all, earnings per share at Goldman were up somewhat (8%) from last year’s second quarter. (Another investment bank Morgan Stanley saw similar benefits from investment banking and trading, and it took less of a provision for credit losses, so its earnings increased a whopping 59%!)
Half of the financial companies in our finance index have not regained the stock price they saw before the Great Recession of 2008 (including Bank of America, Morgan Stanley and Citi). Since that time, they have dealt with more regulations. Also, financial companies tend to grow slower than tech companies, who have been the growth stars since the 2008 recession.
Tech Companies See Continued Earnings Growth
Following this trend, most tech companies saw continued earnings growth in a time when many people stayed home. Amazon was the standout, with earnings almost doubling as people bought more online. Revenues may increase still, looking to the third quarter, but operating income will likely be lower as Amazon books coronavirus related costs – this is according to Amazon’s own guidance.
Second-quarter earnings at Apple and Facebook were also strong. Apple was held up by strong product sales, so its earnings were up 18%. Facebook continued to see user and advertising revenue growth. Earnings roughly doubled at Facebook.
One rough patch was Google’s drop in revenues, due to weakened advertising – the first quarterly decline in ad revenues in its 22-year history. This led to a decrease in Google earnings of 29%, making Google the worst performer in our “Big Tech” index today. The morning after the earnings release, its stock price was down 4%.
Overall, the advertising industry has been weak. Ad agencies like Publicis, Omnicom and IPG all had lower earnings which reflected a weak environment. One digital media company, Vice, is laying off 155 employees it was reported in May. The New York Times laid off 68 people in June. The weakening environment predates the coronavirus. In 2019, the New York Times already saw a huge decline in full-year digital display ad revenues (-6%).
Taken together, there are some disconcerting signs in second-quarter earnings at financial and tech companies. One possibility for the future is that while big revenues related to balance sheet strengthening at investment banks may not recur in coming quarters, loan delinquencies may well increase across all banks. Furthermore, the weak digital advertising environment is already hurting Google and may spread to Facebook at some point and other parts of the economy.
All of the large stocks discussed are grouped in the Finance and Big Tech indexes of our app. You can track the performance of our 18 stocks and 3 indexes on a daily basis. Click here for more information on how we can help you achieve your investing goals.