U.S. stocks have rebounded a lot from the bottom of the bear market in June. Many investors believe that the worst time has passed; but the reality is not so optimistic. But there is another important point in this article — commercial-oriented companies are more resilient to recessions.
Central banks are still in a cycle of rate hikes
It has never happened in the history of the US stock market that in the process of the Fed raising interest rate cycle, the stock market will continue to rise and not fall. The rapid and urgent rate hike in the United States, coupled with the fact that the GDP of the United States in the first and second quarters of this year was -1.6% and -0.6%, respectively, met the economic recession conditions defined by the United States.
The market once speculated that the Federal Reserve may slow down the pace of interest rate hikes. Bets that interest rates will peak early and cut rates at the end of 2023 to stimulate the economy; but the Fed has said on August 3 that another two or three bps will still be raised in September, and a rate cut in 2023 is impossible. The central banks of all major countries are following up on raising interest rates, which means that monetary policy will still dominate the trend of the stock market in the coming year.
Global economy show signs of weakness
The U.S. CPI, which represents inflation, reached a 40-year high of 9.1% in June (Taiwan’s figure in July was 3.36%). High inflation affects consumers’ willingness and spending power, and costs for companies have increased significantly. The result is a downward revision in the profits of listed companies. The Federal Reserve must continue to accelerate and sharply raise interest rates in order to curb it, causing the dollar to be too strong and impacting the profitability of listed companies.
Almost all of the larger listed companies with a higher proportion of multinational businesses have been particularly affected. Microsoft and Alphabet have repeatedly emphasized that the company’s profits will be greatly damaged by the strong dollar. Another typical example is that the cross-border transaction profits of the two major credit card networks, Visa and MasterCard, have also been greatly reduced due to the strong dollar. Since the second quarter of this year, major listed companies, without exception, have started to lay off employees, cut costs, and suspend expansion, etc., the risk-avoiding actions that companies will take first when the economy is slow down, so as to face the upcoming cold winter.
Personal consumption has slowed down
Individual consumers have begun to shrink their hands. Mobile phones and laptops are the most representative personal consumption trends. Counterpoint pointed out that the global mobile phone sales in the second quarter decreased by 8.85% year-oover-year, which is also a 9.78% decrease compared to the first quarter. Meta, which lacks a corporate revenue department, even staged its first quarterly revenue negative growth of 0.9% since its listing. The e-commerce and fintech industries, where most of the revenue comes from the consumer side, experienced a significant decline in revenue. The turnover of e-commerce, financial startups, food delivery industries have almost reset to the growth level before the pandemic.
Intel delivered its worst single-quarter earnings performance in nearly two decades in the second quarter, with a net loss of $450 million, its first loss since the fourth quarter of 2017. The market value was once again surpassed by AMD (AMD’s annual revenue is only 1/5 of Intel’s), and the stock price plummeted 9% the next day, falling back to the level of 5 years ago. According to Gartner, global PC shipments fell by 12.6% in the second quarter of 2022, the biggest drop in nine years. AMD expects PC sales this year to be 17% lower than IDC’s 2021 worldwide PC sales.
Semiconductor demand shows signs of recession
As shown in Figure 1, the survey released by Nikkei on August 4, disclosed the customers’ demand by the US semiconductor distributor Source Engine and the delivery date information of major manufacturers in the second half of this year, which also reflects this fact; mobile phones, and typical end devices for personal computers have been oversupplied, but semiconductor supply and demand in automobiles, industrial equipment, and data centers will continue until the end of the year.
TSMC has warned of slowing demand from smartphone and PC customers, while other non-TSMC foundries have begun to decline in fab utilization, which is consistent with the observations provided in this article– at least for the next six months of this year, sentiment has not improved with the June stock market rally.
Figure 1-Semiconductor supply and demand in the second half of 2022 (Original image source: Nikkei )
Commercial demand not significantly affected, still grow
The data center business of Nvidia and AMD, which represents commercial customers, is still doing well; Nvidia’s data center business revenue surpassed display card first time ever in first quarter (display card represents consumber side demand). It’s data center business revenue increased by 61% in the second quarter.
AMD made it clear that the company’s future growth will come from the data center business. In 2021, AMD’s data center revenue grew more than tripled annually; Intel’s data center business fell 16% during the same period. In the second quarter results, AMD’s data center revenue increased 83% year-oover-year; Intel’s data center revenue fell 16% year-over-year during the same period.
| Company | Consumer business | Conmmercial business | Stock performance, 01/01/2022 to 6/12/2022表現 |
| Microsoft | 14.45 billion +2% | 20.9 billion +20% | -15.49% |
| Alphabet | 7.34 billion +4.8% | 6.28 billion +35.6% | -18.98% |
| Amazon | 101.495 billion +3.26% | 19.739 billion +33.3% | -17.37% |
| Alibaba | 21.29 billion -1% | 2.65 billion +10% | -23.11% |
| Block | 2.619 billion -21% | 1.73 billion +32% | -46.52% |
| Nvidia | 20.4 billion -33% | 3.81 billion +61% | -36.95% |
| Intel | 7.7 billion -25% | 4.6 billion -16% | -33.49% |
| AMD | 2.2 billion +25% | 1.49 billion +83% | -31.90% |
| Apple | 82.96 billion +1.9% | None | -9.15% |
| Meta | 28.82 billion -0.9% | None | -50.64% |
| Paypal | 6.8 billion +9% | None | -51.10% |
As shown in above Table 1, the second quarter performance of the representative consumer and conmmercial sectors , it will be more obvious when we look at the performance of consumer and conmmercial department within the same conmmercial.
Closing words
This once again proves, as I have repeatedly emphasized in the book “The Rules of Super Growth Stocks Investing”, why the market valuation of companies engaged in the commercial customers will always be higher than that of the consumer-oriented companies. In a bear market or economic slowdown, companies that focus on commercial client shows more resilient.
In a bear market or economic slowdown, because the source of income of individual is too monotonous, individual will cut personal spending, resulting in immediate and obvious damage to the business.
However, the source of income of enterprises will be more abundant than that of individuals. Through various external financing and surplus retention, the ability to withstand bear markets or slow down in economic prosperity is better than that of individuals.
Moreover, most of the outstanding companies will take advantage of this opportunity to increase capital expenditures, so as to seize the market opportunities immediately after the economic recovery. Capital expenditures at two-thirds of the S&P 500 rose 20% from a year earlier, according to an S&P Dow Jones Indices analysis of the second-quarter corporate earnings report.
I am the author of the original text, the abridged version of this article was originally published in Smart monthly magazine.
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