Macro Wrap – A Few Earnings Themes, But Margins the Crux

by Enis August 1, 2013 7:59 am • Commentary

We’re more than halfway through earnings season, and a few themes have emerged.  Goldman Sachs research has a solid summary of some persistent takeaways from company reports:

Theme 1: Firms pulling all available levers to support margins

The margin debate continued as companies fought to sustain record profitability. Some firms continued to focus on pricing, cost controls, and efficiency gains, with varying degrees of success. Other companies prioritized sales and were willing to rely on operating leverage or to compromise margins altogether.

Theme 2: China results mixed but future remains promising

Companies reported contrasting views of current activity in China but remain uniformly optimistic about future prospects. Some firms saw business in China continue to post double-digit growth while others noted results more in line with weak 1H GDP prints. Regardless of current performance, however, managements expressed the belief that China growth will stabilize and emphasized that long-term trends remain encouraging.

Theme 3: The impact of rising interest rates

Many firms commented on the effect of the sharp rise in interest rates during 2Q. Financials in particular noted the impact on earnings and margins, while managements from other sectors described changes in pension status, debt expense, and customer activity.

Theme 4: The effect of unusual weather on corporate results

Some managements highlighted the impact of an unusual weather patterns on 2Q performance. A cool, wet season in parts of the US and Europe dampened some consumer activity, while business in other regions benefitted from an exceptionally hot summer.


I ignore theme 4.  It’s a disingenuous excuse considering all the uncertainties a business faces in any given quarter.

As for the other themes, the first point about margins is likely the most important for corporate profits going forward.  Revenue growth shows little sign of picking up across industries, so companies are still relying on cost-cutting, lower taxes, and lower interest expenses to grow profits.

As for China, industrial and materials companies for the most part (with some exceptions, like GE and CMI) reported broad weakness.  However, consumer-focused companies, particularly Chinese internet names, reported strong growth trends.  The real risk in China is on the fixed investment side, and the tail risk is related to financial system concerns.

Finally, the interest rate impact depends on current rate trends continuing.  Many companies boasted about how they had locked in low rates on their debt issuance over the past few years, and that’s no doubt a positive for them (and a negative for investors in those bonds).  Companies that mentioned the business impact of higher rates were largely banks, in reference to lower anticipated mortgage application volumes going forward.  The housing market will be most affected from a macro standpoint.

In the long run, the margin theme probably has the most impact on corporate profits.  Those companies who are able to maintain or grow their margins will be the most rewarded by investors in a stagnant sales environment (unless it’s AMZN).  It’s a metric I plan to analyze more closely as we compare sectors and stocks in the coming months.