While all companies are different, it can be illuminating to look for patterns and similarities in corporate communication. JPMorgan Chase & Co. JPM recently analyzed 25,000 corporate transcripts using an in-house text recognition tool to do just that.
Geopolitical risk
“Discussions of geopolitical risks picked up in 4Q, reaching the highest levels observed in 5 years. At the sector level, there was a pick-up in Energy, Tech Hardware, Banks, and Transportation companies highlighting geopolitical risks. In particular, Energy companies discussed the negative impacts of geopolitics on oil supply and demand sentiment and some delays in regulatory approvals driven by the government shutdown.”
The note goes on to name Brexit, U.S.-China relations and political unrest in emerging markets as the key sources of geopolitical risk for companies and investors. In particular, disruptions to global supply chains caused by the increase in risk is likely to be a significant headache for executives in the tech hardware sector. Moreover, a pileup of systemic risk in the financial sector is a threat to all business as well as the capital markets.
Tariff trouble
“Tariffs remain a key concern for U.S. corporates though there has been a noticeable tick down in focus during Q&A sessions suggesting investors are now better versed on this risk. At the industry level, there has been an uptick among Tech Hardware, Household & Personal Products, Retailing, Capital Goods, and Autos. On the contrary, Materials, Food & Beverage, and Consumer Durables have seen a noticeable decline.”
The retail, auto, technology and personal products sectors showed increases in the number of mentions of tariffs, which is perhaps not surprising. Interestingly, however, some companies seem to have be getting used to living in a tariff world, with the materials, food and beverage and consumer durables sectors showing decreases in the number of tariff mentions. Another notable takeaway from JPMorgan’s analysis was that companies are not forecasting a resolution to the U.S.-China trade war, meaning there is sizeable upside on the table if a favorable deal is reached.
Rising wages not a concern
“Contrary to popular investor narrative, fewer S&P 500 companies are highlighting rising wages as a risk. Labor-intensive industries (typically less specialized workers) remain concerned about the tightening labor market. On the other hand, sectors that employ a more skilled workforce (Technology, Healthcare, Financials) less frequently discussed labor and wages in company reports. Since the latter makes up ~60% of S&P 500 market cap (and growing), the expanding labor market should be a net positive for S&P 500 profits through rising demand/revenue, which should more than offset wage pressures at this point in the cycle.”
Another surprising finding of the study was companies do not seem overly concerned about rising wage costs. This is noteworthy as wage growth is often considered to be a major contributing factor to shrinking corporate margins (along with tariffs and interest rate hikes). With the Federal Reserve putting the brakes on rate hikes this year, and with wage increases seemingly not worrying management teams, this suggests margins may not become as compressed as some have feared.
Disclosure: The author owns no stocks mentioned.
Read more here:
