With the losses of the S&P 500, which is suffering a recession for the first time since 2017, there are names of big companies worthy of blame.
The financial results for the second quarter of the S&P 500 calendar showed a decline for the second consecutive quarter, a trend referred to as a slump in profits. Profits fell 0.35 per cent in the second quarter, based on companies that were in the index at the end of the previous earnings season after a 0.29 per cent decline in the first quarter.
An analysis of the fact-finding data shows that five large companies were the largest contributors to the first-half recession: Apple (AAPL), Boeing (BA), Exxon Mobil Corp. (XOM) Facebook Inc. and Micron Technology. The reasons for the decline in profits of each company vary, which means that this recession cannot be blamed on the sector itself.
Boeing suffered a severe loss in the second quarter because of the safety of its 737 aircraft, following two fatal crashes. In addition to the financial blow to the decommissioned aircraft, the company announced that it would incur higher production costs. Boeing eventually reported a net loss of $3.3 billion in the second quarter after making 1.9 billion in profit a year earlier, making it the biggest contributor to the decline in the second quarter this year.
Weakness in oil prices and business lines helped drive Exxon Mobil’s second-quarter profit down, a trend in which the company expects to report its third-quarter report. Exxon reported a 34 percent drop in overall revenue.
While Exxon’s revenue decline was not the largest in the energy sector, the market weighting of the S&P 500 means that its results have a significant impact on the overall earnings performance of the index. For example, Noble Energy (NBL) suffered a 158 per cent drop in revenue in the second quarter, but its result had a relatively minor impact on the S&P 500 earnings. Of course, Exxon is almost 30 times larger than Noble.
Apple has a similar problem. While it was not the worst performer in terms of profits in the hardware sector, due to the company’s huge gross profit means that a 16.4% profit decline in the first quarter of the year was the largest contributor to the decline in that period. Apple’s profits fell 14.7 percent in the first half of the calendar year as its strategy to sell the most expensive smartphones ever faced mounting pressure in the latest iPhone release, which was compounded by geopolitical tensions with China.
Facebook and Micron earnings statements confirm other problems experienced by major technology companies. Facebook received a $5 billion fine in the first half of the year after settling with the Federal Trade Commission. The social media company is also facing the issue of spending more in order to enhance the safety and security of its platform, as this has become an increasingly real problem for the big players in the world of social media.
Micron’s earnings remained under pressure after the high cost of memory chips rose in 2018 and sharply boosted Micron’s profit the previous year. However, Micron’s profits fell by more than 50% in each of the first two quarters of the year, and have already pushed the S&P 500 in the second and half quarters for the third consecutive quarter of declines.
Analysts expect earnings to fall sharply until the third quarter. Facebook is the only one of the top five shareholders expected to post a third-quarter profit increase. The overall profit of the current components of the S&P 500 is expected to decline by 4.88%.
While the S&P 500 has fallen this year, share prices have not fallen. The S&P 500 has soared 18.5% so far in 2019, while the five companies contributing to the recession have also risen so far this year, starting with a 1.5% increase in Exxon to 49.5% for Apple.