Tech Earnings Stumble Could Have Broad Economic Ripple Effect

After a contraction in the first quarter of 0.3 percent, blue-chip firms in the United States are forecasted to have a 2.8 percent fall in earnings per share for April to June. If those forecasts are realized, the two consecutive quarters of shrinking earnings would be considered an “earnings recession,” Financial Times reported.

“The margin pressure for large tech companies is what is driving the drop in earnings,” said Credit Suisse Senior Equity Strategist Patrick Palfrey, according to the report. “There is earning pressure but it’s not universal — it’s being felt among a few companies, but they happen to be very large.”

Even with the contraction of earnings in the first quarter, shares in the United States have continually risen. The S&P 500 index of firms in the United States reached 3,000 points following comments from Federal Reserve Chairman Jerome Powell, who reinforced the perspective of the market that the central bank will clip interest rates.

The tech sector is undergoing pressure on profits because of a tightening labor market. It does not include social media companies like Google and Facebook any longer following an index reshuffle. Labor costs are said to comprise approximately 16 percent of informal technology company revenues.

However, FT reported that “not all analysts are convinced earnings will fall.” The outlet noted that U.S. firms often provide “dire guidance” to cause analysts to decrease earnings predictions, which offers a low bar to come out ahead of at the time of the official release of earnings.

The news comes after it was reported that 77 percent of companies that have issued pre-announcements ahead of earnings reports said profits will be under expectations of Wall Street. Analysts have already forecasted a drop for the first three quarters of 2019, and companies are now joining the chorus of dissent.

FactSet reported that this is going to be the second-worst quarter since the organization began compiling in 2006, and two highly tariff-sensitive sectors, healthcare and tech, will take the largest hits.