What's going on?
On Wednesday, American machinery firm Caterpillar reported a third-quarter profit that left a bad taste in investors’ mouths and a forecast that turned their stomachs.
What does this mean?
Caterpillar’s revenue and profit was much lower than investors had predicted – and since the company makes sales all over the world, investors tend to see it as a bellwether for the global economy. So Caterpillar’s sales in the US and Asia – which fell 3% and 13% respectively from the same time last year – suggest customers might have put purchases on hold due to the uncertainty created by the ongoing US-China trade war.
But they say everything’s bigger in Texas, and that was certainly true of chipmaker Texas Instruments’ disappointment late on Tuesday. It reported lower sales than expected and cut its forecast for the year, again blaming a trade war-related slowdown in customer purchases. Texas’ stock then went south 7% on Wednesday.
Why should I care?
For markets: Marginal moves hit hard.
Large industrial companies like Caterpillar tend to have high fixed costs they pay no matter what – like rent, energy, and wages. That’s useful when sales are growing, because new revenues only bring small “incremental” costs (i.e. product materials) and, as such, generate high profits. But when sales fall, those hard-to-cut costs eat into revenues, causing an even bigger profit drop. That partly explains why Caterpillar’s quarterly revenue was 6% lower, but its profit fell 8%.
The bigger picture: Brace for a decline.
Aircraft maker Boeing’s third-quarter results on Wednesday also fell short of investors’ expectations. But that was perhaps unsurprising given the company’s own difficulties in predicting its earnings this year. The company did warn that it was reducing the production of some of its planes, likely in response to weaker Chinese demand. That could be a sign of further forthcoming weakness among industrial companies – one that could become a pattern as others report earnings updates.