Thursday, 15 October 2015

Yesterday's earning surprises point to weaker US growth

In a shock announcement made yesterday by Walmart executives that the company is going to see a shrinkage in earnings and lacklustre revenue growth in the next 3 years, stocks in the world's largest retailer plunged to its largest daily loss since 1988 falling over 10% as investors made their unhappiness known at the company's failure to prevent Amazon from swaying customers away.

One of the reasons for a decrease in forecasted earnings is a stronger dollar, something that I've been highlighting more recently. If one considers Walmart's investment outside the US one can imagine the effect a stronger dollar has on repatriating earnings back home but not only this the slump in economic activity seen in emerging markets, an area where Walmart has focused on for growth, only serves to exacerbate the problem further.

Walmart is a perfect gauge for investors to ascertain the overall condition of the economy as they are retailers selling everything from basic necessities to high price ticket items. If these guys can't foresee stronger growth how is the rest of the economy suppose to react.

The company also stated the tough competitive retail space at the moment suggesting the saturation of many smaller retail stores having a negative impact on customers coming in. If the US economy were growing sufficiently enough it would be able to support sales growth but in the current climate, retailers stepping on others turf is flashing signs that all is not well within the world's biggest economy.

The earning season disappointments don't stop there with streaming company Netflix missing a number of key expecting figures such as earnings, revenue and US subscriber growth but its international rollout of its services pretty much smoothing over the most of the concerns.

The company which is on target to meeting its goal of obtaining just over 74 million subscribers at the end of the year which is an impressive feat nonetheless is set to start delivering "material" profits come 2017.
However much of the slump had been recovered after investors digested the good the bad and the ugly and settled for a lower price but not as bad as initially thought. What will be interesting to see is if US subscriber growth continues to disappoint, if so then it can be attributed to below par economic growth within the region stressing an even more pungent point that things could get worse.
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