Gartner Analysis of 2018 Earnings Transcripts Shows Companies Bracing for Recession

U.S. Businesses Demonstrating Widespread Focus on Restructuring and Efficiency

ARLINGTON, Va.--()--Analysis of S&P 500 2018 earnings transcripts shows fading exuberance among corporate executives as the year progressed, according to Gartner, Inc. Several sectors are undergoing an earnings recession, and efficiency and restructuring initiatives are increasingly common.

“S&P 500 company executives are concerned about the risks and uncertainty from government interventions rather than suspecting any global macroeconomic downturn in the near term,” said Tim Raiswell, vice president at Gartner’s finance practice. “Talk of capital and cost-efficiency programs was increasingly common in earnings calls as 2018 progressed.”

Economic Downturn?

“Mentions of the words ‘downturn’ and ‘slowdown’ were four times more likely to appear in earnings call in 4Q18,” said Mr. Raiswell. “Yet it’s important to consider that 4Q18 brought relatively extreme drops in stock prices. After 10 years of economic expansion, it’s not surprising to see analysts asking company executives about their preparations for cyclical economic weakness.”

Most executives, however, remained optimistic about the U.S. economy in 2019. The companies most exposed to China were more likely to report demand weakness in 2018, or predict it occurring in 2019. Sentiment was particularly positive in the technology and communications sectors.

“Even while expressing a broadly positive economic outlook, many of the world’s largest companies are starting to behave as if they are in a recession,” said Mr. Raiswell. “Ford, Pepsi and P&G are all recent high-profile examples of companies announcing large-scale efficiency programs.”

Top Concerns

The most commonly cited economic concern was the slowing Chinese economy. This theme emerged strongly in 4Q18 and has since picked up momentum in 2019 earnings calls. Much of this concern for China and the wider global economy outside the U.S. was more related to unpredictable government interventions than to any strong conviction of underlying economic weakness.

Common U.S.-related concerns were the recent government shutdown, tariffs and trade policy uncertainty. Worldwide political issues cited were Brexit and the fractious political landscape within the Eurozone, as well as concerns in the Middle East and in South America.

“Given the lack of realistic precedents in many cases, all parties are largely guessing about the extent to which political rhetoric will become firm policy and what the impact will be on companies’ order books,” said Mr. Raiswell. “In this uncertain environment and after a long stretch of expansion since 2009, a significant number of leading firms are taking a recessionary stance and making preparations to capitalize on a downturn rather than be a casualty of one.”

The growth of nonbank lending emerged clearly in financial services earnings calls. Nonbanks offer high-risk loans to consumers at prices that many banks are not willing to match. This strong competition is why the theme emerged in earnings conversations.

“While many economists suspect that the next U.S. recession will take a different form than the financial liquidity crisis of 2009, there should be concerns among CFOs and treasurers that this growth of nonbank lending poses a risk to the U.S. financial system. Nonbank portfolios tend to be built on higher-risk loans to low-income clients. A combination of this phenomenon and any future easing of banking and lending regulations could spell trouble for the global economy in the next few years,” said Raiswell.

Winning in the Turns

Many large firms reported that cost management initiatives are well underway, largely targeting overhead categories such as marketing, advertising and finance, as well as direct industrial production costs. For example, P&G, Estée Lauder, Whirlpool and others all detailed significant firmwide productivity programs. Several vehicle manufacturers, such as Honda, Ford and Nissan, began initiatives to consolidate their production in fewer facilities to drive efficiencies. Many more firms reported deliberately lower capital expenditure than expected in 2018, as growth capital was reallocated.

“The CFO’s posture is critical now. Gartner cautions against a ‘business as usual’ approach that fails to change a winning formula when faced with turns in market direction,” said Mr. Raiswell. “While signs of early preparation bode well for company performance, if a downturn appears, this preemptive behavior does raise questions. How much further will executive teams have to cut costs if demand plummets, and will this take the form of more-drastic forms of restructuring, such as layoffs and divestitures?”

Gartner clients can read more in “Financial Strategy Trends and Sentiment Review: Consumer and Technology Sectors.”

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Contacts

Rob van der Meulen
Gartner
Tel +44 1784 267 892
rob.vandermeulen@gartner.com

Contacts

Rob van der Meulen
Gartner
Tel +44 1784 267 892
rob.vandermeulen@gartner.com