[Good Morning Stock Market] Oil Prices Rebound but Uncertainty Remains... US Economy Expected to Contract

US GDP Expected to Contract for First Time in 6 Years
Companies Face 'Boritgogae' in Q1 Earnings, Adding to Concerns

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Despite the rebound in international oil prices, the U.S. stock market closed mixed due to sluggish development of COVID-19 treatments and an increase in the number of unemployed. The Dow Jones Industrial Average rose 0.17% from the previous day to 23,515.26, while the S&P 500 index fell 0.05% to 2,797.80. The Nasdaq, which is tech-heavy, also closed down 0.01% at 8,494.75. With various first-quarter economic indicators such as the U.S. manufacturing Purchasing Managers' Index (PMI) showing weakness, the U.S. economy is expected to contract for the first time in six years. As the first-quarter earnings season approaches, U.S. companies are expected to face a 'lean season,' indicating that uncertainty due to COVID-19 remains high.

◆ Heejin Kwon, Researcher at Korea Investment & Securities = The U.S. first-quarter Gross Domestic Product (GDP), to be announced on the 29th (local time), is expected to decrease by 3.9% compared to the previous quarter. This would mark the first negative growth since the first quarter of 2014. The median market forecast is -3.0%, but projections range widely from 0% to -15%. Given the unprecedented halt in U.S. economic activity since mid-last month, uncertainty is extremely high.

In particular, personal consumption expenditures (PCE) and equipment and machinery investments are considered major factors dragging down first-quarter growth. Personal consumption growth had already slowed to about 0.1% month-on-month since the end of the third quarter last year, and likely contracted further following the administrative orders for 'social distancing' last month. The Census Bureau reported that retail sales dropped sharply by 8.7% month-on-month last month. Considering that this indicator tends to overstate durable goods such as automobiles, assuming private consumption fell about 4% month-on-month last month, first-quarter consumption is expected to reduce overall GDP growth by approximately 3 percentage points (p). This would be the first negative private consumption growth since 2009.

Equipment and machinery investments are also expected to contribute negatively to growth. The contribution of equipment and machinery investments, which recorded -0.5%p in the third and fourth quarters of last year, is forecast to decline further to -2 to -3%p in the first quarter of this year. Durable goods orders, which precede corporate investments, have not increased at all since peaking in September 2018. Since mid-February, concerns over global demand weakness have spread, causing companies to become more reluctant to make new investments. With corporate bond yields soaring in financial markets, making financing difficult and cash flow worsening, companies likely have strong incentives to delay planned investments if possible.

On the other hand, construction investment is expected to have continued its upward trend. Supported by lower mortgage rates, U.S. housing demand increased, leading to a strong construction sector in the first quarter. Housing starts in the first quarter reached 4.38 million units, a 2% increase compared to the fourth quarter of last year. Government consumption and investment likely increased as well. Although tax revenues declined due to the economic downturn, expenditures such as unemployment benefits and subsidies increased significantly, making higher spending inevitable. However, it seems difficult to prevent an overall economic contraction.

◆ Haesol Lim, Researcher at Daishin Securities = The 12-month forward price-to-earnings ratio (PER) of the S&P 500 stood at 18.7 times, and the 2020 consensus earnings per share (EPS) for the S&P 500 was revised downward by 5.3% compared to the previous week (as of April 22). The large-scale shutdowns to contain the spread of COVID-19 have materialized as earnings season shocks, leading to continued downward revisions of earnings forecasts. Earnings downgrades persisted in sectors directly affected by COVID-19, including energy (-48.3%), financials (-15.8%), industrials (-9.4%), and consumer discretionary (-7.3%).

In particular, the earnings shock in the first quarter from major banks entering the earnings season significantly widened the downward revision in the financial sector. Based on net income, large banks such as Bank of America (-40%), Goldman Sachs (-46%), and Citigroup (-46%) saw profits plunge by at least 40%. In the energy sector, April oil demand declines are estimated to have exceeded the OPEC+ production cut agreement (a daily cut of 9.7 million barrels involving OPEC and 10 other oil-producing countries) by about three times, causing the West Texas Intermediate (WTI) May futures to record a historic first negative price.

However, Boeing (BA) saw the largest upward revision in first-quarter earnings forecasts. This is attributed to the phased resumption of operations at its Washington state plant and the restart of the 737 Max production line, which had been halted since the crash in January. Conversely, General Motors (GM) saw its earnings forecast downgraded due to an 85.9% factory shutdown rate and the suspension of its vehicle-sharing service launched in 2016.

This content was produced with the assistance of AI translation services.