Another day, another record high for the market. According to data released this morning, U.S. Q3 GDP growth clocked in at 2.1%, beating out analyst estimates of 1.9%.
Q3 corporate earnings growth shrunk year-over-year, but now, encouraged by better than expected GDP growth, bulls have reason to feel good about last quarter.
Don’t forget that during this last earnings season, scores of CEOs upgraded their guidance for 2020. They thought, at the time, that another economic expansion was coming.
But according to a top Wall Street banker, America’s corporate leaders have experienced a change of heart.
John Richert, J.P. Morgan Chase’s regional investment banking head, says that the CEOs he’s spoken with do not echo the general market’s bullish sentiment. Richert claims that trade war uncertainty has companies rattled, even in the wake of solid Q3 growth.
“Everybody looks at the stock market and sees share prices going through the roof right now, but few of the CEOs I talk to feel good about that,” he said.
“There is an increased worry about their ability to deliver results amid prolonged periods of uncertainty next year.”
In fact, based on a poll conducted by the Conference Board, a non-profit research group comprised of 1,200 of the world’s biggest corporations, CEO confidence is the lowest its been in a decade.
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Supported by a strong job market, consumers remain relatively optimistic. Their strong spending has lessened the impact of trade war tariffs and possibly staved off a recession.
But CEOs aren’t convinced that will continue.
Consumer confidence fell short of consensus estimates yesterday, and with a crucial holiday season ahead, Q4’s shaping up to be a “make or break” moment for the U.S. economy.
And in anticipation of reduced consumer spending, Richert says corporations are looking to get leaner at all costs.
Even merging with competitors if need be.
“There’s a lot of discussions among industry players to figure out the best way to put companies together,” he said.
Mid-cap companies, Richert claims, are trying to buddy-up in the event of a downturn. By combining revenues and boosting efficiency, “mergers of equals” could help corporations scale up while becoming more resilient to economic headwinds.
And though most American corporations had a good Q3, Richert says that a few sectors are already in “recession mode,” buoyed by a small number of overachievers.
“You talk to any industrial, old-line economy company here in the U.S., they’ll tell you we’re in a recession right now,” he said.
“The service economy and tech is keeping the cycle going for now.”
Richert’s comments align with the current trend in the online brokerage industry, where Charles Schwab and TD Ameritrade just announced a merger of their own. Now that brokers have gone “no fee” to stay competitive, they’re scrambling to reduce costs.
It’s a shift that could extend to other sectors as well, where fierce competition has dramatically narrowed the margin of error. These days, service-based companies are incredibly “lightweight”, having cut overhead expenses to the bone.
The only thing left to do is join forces, potentially boosting earnings even further.
In the end, “merger mania” (if it happens) could propel equities higher. Investors, executives, and consumers would all benefit from smartly timed buyouts.
Especially if it results in another quarter of better than expected growth.