The US economy is surging – but problems elsewhere could still torpedo profits for big companies like Apple and Tesla
Aly Song/Reuters
- The US economy is surging, with growth coming in at a hotter-than-expected 4.9% for the third quarter.
- But problems elsewhere could still be bad news for big US companies, including Apple and Tesla.
- China's slowing economy and the war between Israel and Hamas are both potential headwinds, according to analysts.
The US economy's strength has defied all expectations this year — weathering recession calls, the highest interest rates in decades, and even a banking crisis. Advance estimates show GDP rose 4.9% last quarter, smashing forecasts.
And yet, none of that means the country's best-known and biggest companies can afford to relax.
That's because they now face a worrying mix of global risks — from a deepening economic slump in China to a raging war in the Middle East and the continuing conflict in Ukraine — that's posing headwinds to their international operations.
In China, policymakers have struggled to arrest a growth slump after nearly three years of on-off COVID-19 lockdowns, with the world's No. 2 economy also battling debt problems and a property crisis.
The China challenge
That's bad news for mega-cap US firms such as Apple and Tesla, which count the Asian nation as a major market. Top chipmakers Nvidia and Intel each gets more than a quarter of their earnings from China, while it's 17% for Nike, according to Goldman Sachs.
Apple makes almost a fifth of its revenues from China — and there are already signs that the country's stalling economy is hurting the tech giant's bottom line. Sales of the newly launched iPhone 15 have dropped by 6% in its launch month, compared to the device's predecessor, according to market researcher GfK.
"Obviously it's great to see the US economy looking strong, but if China is very weak, there'll be a huge knock-on effect in other areas too," Michael Field, a market strategist for Morningstar Research, told Insider. "The likes of Apple – obviously, it's not just them. A lot of companies are going to feel that pain and it's going to exacerbate an already-negative situation."
Meanwhile, Tesla's aggressive price cuts have failed to stoke up demand for its cars in China, with the EV maker losing some market share to local rivals like BYD, per Bank of America.
Lackluster sales for the two American companies aren't that surprising.
Chinese consumer spending is yet to return to pre-pandemic levels, putting a dampener on sales for other big American companies including DuPont and Procter & Gamble.
'Maoist monetary policy'
It also doesn't help that Beijing has been unwilling to boost China's economy with a large-scale stimulus measures, like it did during the 2008-2009 global financial crisis, worrying investors who are dumping Chinese assets.
"There are multiple causes for concern around China and growth. They seem to be very Maoist about monetary policy, unwilling to bend interest rates and signaling that they'll let the economy ride the way it is," Field said.
Signs of a sustained economic recovery in China have been elusive with manufacturing activity unexpectedly contracting in October from a month ago.
"In China, weakening economic momentum, a deepening property sector downturn, and growing strains on local government financing weigh heavily on market sentiment. On balance, risks to global growth continue to be skewed to the downside," the International Monetary Fund said in its Global Financial Stability report published last month.
'Cascading crises'
And the slowdown in China isn't the only overhanging risk for US companies — heightened geopolitical tensions are now posing an elevated risk to global markets, according to BlackRock.
"There is a historically large number of unstable and volatile situations in the world, where matters of war and peace are at stake," strategists at the world's biggest asset manager, led by Tom Donilon, wrote in a recent report. "A series of cascading crises is bringing significant uncertainty, volatility, and fragility to geopolitics and markets. War in the Middle East, Russia's invasion of Ukraine, and US-China tensions have accelerated geopolitical fragmentation."
The outbreak of war between Israel and Hamas is the latest geopolitical nightmare for Wall Street, with investors fretting that other countries in the Middle East, including Iran, could become embroiled in the conflict.
"We observed pauses in spending from a large number of primarily brand-oriented advertising campaigns immediately following the onset of the war in the Middle East, and this has been a headwind to revenue quarter-to-date," Snap said in its third-quarter earnings report last week.
Meanwhile, Meta Platforms' CFO Susan Li said on a call with analysts that the company had widened its revenue guidance range for the fourth quarter, citing a slowdown in advertising spending and geopolitical instability in the Middle East.
"We have observed softer ads in the beginning of the fourth quarter, correlating with the start of the conflict, which is captured in our Q4 revenue outlook," Li said, referring to the war.
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