Tech Gains Dull the Bite of Record Economic Losses

Markets were able to swallow the bitter pill from Thursday’s disastrous GDP report, rallying past early losses on the strength of tech stocks.

Women carrying Hermes shopping bags use hand sanitizer Thursday as they walk in New York on Wall Street. (AP Photo/Mark Lennihan)

MANHATTAN (CN) — A day after the biggest drop in U.S. GDP, markets started with a sour taste in their mouth but ended up rallying late in the day.

Earlier in the day the Dow Jones Industrial Average lost about 300 points, but it ended up gaining 115 points for the day, a 0.4% increase, after a rally brought on by Apple and other tech companies. The S&P 500 saw a similar trend, gaining 0.7%, while the Nasdaq gained about 1.5%.

The initial drop was likely aftershocks from the earth-shattering report by the Commerce Department on Thursday that U.S. GDP fell by an annualized 32.9% in the second quarter, the largest annualized contraction on record

Even though the drop in GDP was expected, it has clearly rattled some investors, and some expect a relatively large percentage increase in GDP during the third quarter.

“We have not been expecting a V-shaped recovery,” economists at UBS wrote in an investor’s note. “The extend of the weakness in investment supports a gradual restart.”

Gregory Daco, chief U.S. economist at Oxford Economics, said: “I don’t think a V shape was ever in the cards, but it’s even less so today.”

The Conference Board, which represents corporate CEOs and others executives, also has grown wary about the chances of a V-shaped recovery throughout the year.

“Looking ahead, given the rapid spread of the virus over the summer and the impact it has had on many states, it is not clear that economic activity will significantly improve from June/July levels,” said Eric Lundh, the board’s senior economist. “We anticipate some recovery in the second half of 2020, but do not expect the economy to reach pre-Covid-19 output levels until 2021 at the earliest.”

Others remain somewhat bullish. “We think we’re having a V-shaped recovery in the economy,” Morgan Stanley Chief U.S. Equity Strategist Mike Wilson said during an interview on Bloomberg, adding that the markets should “broaden out” soon.

“There’s still a lot of skepticism out there about what next year’s going to look like, and that’s why the market has gravitated back to these Covid beneficiaries and why it’s gotten narrow,” he said. 

Things look dire abroad, as well. On Friday, the 19-country Eurozone economy reported that it suffered a 12.1% drop in economic activity last quarter, a record plunge.

European markets fell for the first time in weeks on the news, with exchanges in France and Germany posting 1.4% and 0.5% declines, respectively. The pan-European Stoxx 600 lost about 0.9%.

Consumer sentiment is also dropping again, according to the University of Michigan, which reported its index fell from 78.1 in June to 72.5 this month, a 7.2% decrease. Chief economist Richard Curtin noted the expectations index fell back to 65.9 for July, which indicates consumers expect the recession to continue.

“While the 3rd quarter GDP is likely to improve over the record-setting 2ndquarter plunge, it is unlikely that consumers will conclude that the recession is anywhere near over,” he said in a statement. “The lapse of the special jobless benefits will directly hurt the most vulnerable and spread even further by missed rent, mortgage, and other debt payments.”

Today is the last day of the $600 plus-up for unemployment benefits. Congress has been debating a fourth stimulus package but has reached an impasse over several issues, including the extra unemployment. 

Meanwhile, Big Tech earnings closed out the week in quarterly reports, showing most of the industry’s leaders did better than expected last quarter.

Apple reported its revenue increased 11% over a year ago, from $53.8 billion in Q2 2019 to nearly $60 billion last quarter, while its net income jumped from $10 billion to $11.2 billion during that period. The growth was due to double-digit boosts in the company’s products and services divisions.

“The record business results drove our active installed base of devices to an all-time high in all of our geographic segments and all major product categories,” CFO Luca Maestri said in a statement. Apple stock skyrocketed more than 10% on the day’s trading. 

Facebook also posted sizeable gains, seeing its revenue jump 11% year over year from $16.8 billion in the second quarter of 2019 to $18.6 billion last quarter and a huge 98% increase in net income, from $2.6 billion to $5.1 billion during that same period. Facebook stock enjoyed an 8% lift in trading.

It wasn’t all sunshine for Big Tech, however. In its earnings release, Google parent company Alphabet reported its first ever decrease in revenue, from just under $40 billion in Q2 2019 to $38.2 billion last quarter. The company took an even bigger hit in net income, losing nearly $3 billion over that period. One of the few bright spots on the company’s financial statement included advertising on YouTube, which grew by about $200 million year over year.

As expected, things were even worse in the oil industry, which has been ravaged by little demand due to state shutdowns, overflowing storage, and historical price lows.

In its release, Exxon Mobil posted a $1.1 billion loss last quarter, a 135% decrease year over year from its $3.1 billion in earnings during Q2 2019. “The global pandemic and oversupply conditions significantly impacted our second quarter financial results with lower prices, margins, and sales volumes,” said CEO Darren Woods in a statement, noting he is hopeful to get the company pointed upward later this year. “The progress we’ve made to date gives us confidence that we will meet or exceed our cost-reduction targets for 2020 and provides a strong foundation for further efficiencies.”

Chevron meanwhile posted a second-quarter loss of $8.3 billion, a 290% plummet from the $4.3 billion the company made in Q2 2019. CEO Michael Wirth noted in the company’s presentation that he expects the company’s financial results to remain depressed well into the third quarter. “We’re focused on what we can control,” he said in a statement. 

Caterpillar also reported a massive drop in sales last quarter, with revenues of $10 billion compared with $14.4 billion a year ago. The company’s profit margin year over year nearly halved, from 15.3% in Q2 2019 to 7.8% last quarter.

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