The outlook for corporate America

Still ailing - experiencing difficulty and problems (economy, car), weak and
suffering from illness (about people)
NEW YORK
Look beyond the frothy stockmarket and booming tech giants and you will find
that much of American business is still in a sorry state
Froth refers to a market condition where an asset's price begins to increase beyond its intrinsic
value. A frothy market is characterized by overconfident investors that ignore market
fundamentals and bid up an asset's price beyond the asset's quantitative worth.
Booming – thriving, successful
The hastings - the political activities and speeches that happen before an election and are
intended to win votes
Funk - the state of being unhappy and without hope:
The team’s been in a funk, losing three of the last four games.
On the hustings, both Donald Trump and Joe Biden promised to revive America’s economy from
its pandemic-induced funk. Doing so will require a turnaround for corporate America, which has
suffered a savage downturn (uncontrolled, severe). When the occupant of the White House
starts his four year term in January, in what state will American business be?
Some recent vital signs may look promising. America’s economy expanded at a record pace of
33%, on an annualised basis, in the third quarter. Total profits for the big firms of the s&p 500
index have surpassed (exceed, be better than) analysts’ expectations by roughly a fifth, with
85% beating forecasts for the quarter. Michael Wilson of Morgan Stanley, a bank, calculates
that revenues for the median s&p 500 firm rose by 1% year on year. Small wonder that the
Conference Board, a research organisation, published a survey on October 20th finding that its
measure of confidence of bosses at big companies has jumped to 64 from 45 in the previous
quarter—a figure above 50 indicates more positive than negative responses.
The S&P 500, or simply the S&P, is a stock market index that measures the stock performance
of 500 large companies listed on stock exchanges in the United States. It is one of the most
commonly followed equity indices. S&P 500 — фондовый индекс, в корзину которого
включено 505 избранных торгуемых на фондовых биржах США публичных компаний,
имеющих наибольшую капитализацию. Список принадлежит компании Standard & Poor’s
и ею же составляется.
Yet anyone tuning into big firms’ quarterly update calls with Wall Street investors could not
help but (не мог не) pick up the tentative tone and frequent dour notes of executives. Visa, a
payments company, for example, called the recovery “uneven”. Caterpillar, a maker of
industrial machinery, admitted it is “holding more inventory than we normally would” because
of the uncertainties resulting from the pandemic. And a close analysis of the figures suggests
that the corporate recovery is very patchy, with some industries and smaller firms still in big
trouble. Meanwhile, corporate balance-sheets are under strain (having to do too much, dealing
with a difficult problem), which could hold back investment and lead to an eventual rise in
defaults.
America’s economic boom in the latest quarter would be impressive had it not come on the
heels of(If something comes on the heels of something, it follows very soon after it) a
comparable decline in gdp in the previous three-month period. The economy remains 3.5%
smaller than it was at the end of 2019, reckons the Conference Board, and it is not likely to
return to its pre-pandemic level until the tail end of 2021 or possibly later (see chart on next
page). As for the large proportion of companies where profits exceeded expectations this
quarter, Tobias Levkovich of Citi, a bank, is unimpressed: “Beating lowered earnings
expectations is not that great a feat (achievement).” It is now clear that analysts were too
pessimistic when they pencilled in (to put (someone or something that may be changed later)
on a schedule, list, etc.) their forecasts earlier in the year. He adds that many firms managed to
improve profits not by boosting sales but by slashing their expenses (To slash something such as
costs or jobs means to reduce them by a large amount). The business outlook remains
“squishy”, he reckons, as “you can’t costcut your way to prosperity.”
The more you peer into the numbers, the more inconsistent the recovery looks. One source of
differentiation is where a company’s customers are based. Jonathan Golub of Credit Suisse,
another bank, estimates that the companies in the s&p 500 reported an aggregate revenue
decline of 2.8% and a fall of 10.2% in profits in the third quarter compared with a year earlier.
But he estimates that at American firms focused on exports profits plunged by over 14%,
whereas those companies more reliant on the domestic market suffered a drop of less than 9%.
Size is another lens which reveals the uneven recovery. Binky Chadha of Deutsche Bank argues
that it is “a tale of two stockmarkets”. The market capitalisation of the five biggest tech giants
(Facebook, Amazon, Apple, Microsoft and Alphabet) has fallen in recent weeks from its peak of
roughly a quarter of the entire value of the s&p 500 index. Even so, they have generated
returns of 39% for shareholders this year and without them the 495 others have produced a
return of -1%.
Small and medium-sized firms (SMEs) have been crushed. The proportion of them that are
making losses—based on the Russell 2000, an index of SMEs—has declined a bit from its peak
of above 40%, but it remains well above 30%. SMEs are nearly four times as likely to be losing
money as big firms, a far worse situation than during the recession of 2001 or the global
financial crisis a decade ago.
The mood in the board rooms of small companies is foul (extremely unpleasant). The latest
survey of executives at SMEs, published by the Wall Street Journal and Vistage, an executive-
coaching organisation, found sentiment “stalled in October 2020 due to increased concerns
about an economic slowdown amid a resurgence (recovery) in covid-19 infections.” The gloomy
outlook, the most pessimistic in six years, may be explained by the fact that 42% of small firms
believe they will run out of cash in under six months.
If the inconsistency of the recovery is one worry, the other is the state of firms’ balance-sheets.
Corporate debt was rising before the pandemic, and many firms have piled on more borrowings
in order to cover the shortfall (deficit) in revenue they have experienced this year. Edward
Altman of nyu Stern School of Business is worried about what he calls “the enormous build-up
of non-financial corporate debt.” By his estimation, firms have issued more than $360bn in
high-yield debt (ie, junk bonds облигации) so far this year, surpassing the previous record of
$345bn in all of 2012. With debt-earnings ratios reaching critical levels, and a resurgence in
corporate defaults, Mr Altman reckons that 6.5% to 7% of junk bonds, by dollar value, will
default in 2020.
His fears are echoed by s&p Global, a credit-rating agency. It calculates that the “distress ratio”
(distressed credits are junk bonds with spreads of more than ten percentage points relative to
us Treasuries) for American companies had come down to 9.5% in September from its peak of
36% in March but that it remains above pre-pandemic levels. Corporate America already leads
the world in the tally of corporate defaults this year, with 127 by the end of October. Nicole
Serino of s&p Global notes that corporate credit quality is deteriorating, with the number of
firms rated a lowly ccc+ or below now 50% higher than at the end of 2019. For such firms, she
worries that “excess liquidity and low interest rates are only postponing the inevitable.”
With a large share of firms still making losses and given the weakening of balance-sheets it is far
from clear that American business is in the clear (no longer in danger or suspected of
something). What happens next depends on three unknowns. One is the fallout (side effect)
from this week’s presidential vote. A prolonged period of post-election uncertainty would
weigh on the mood, notes Mr Levkovich. He points to the 11% fall in the s&p 500 index after
the election in 2000 while legal wrangling decided the outcome of the contest for the
presidency between George W. Bush and Al Gore.
Another unknown is the timing and size of the next package of fiscal stimulus from Congress,
which at the moment is frozen by partisan gridlock in Washington, dc, and which could be
limited if the Republicans keep firm control of the Senate. This matters to companies because,
as Mr Golub puts it, “the government has effectively said, ‘We do not want market forces to
drive firms out of business right now and so we are going to backstop (support) a large part of
the economy.’ ” Mr Wilson believes that the number of companies going bankrupt so far this
year has been much lower than otherwise feared because of generous stimulus measures.
The biggest unknown, though, is the pandemic. Moody’s, a credit-rating agency, predicts that
corporate-debt defaults will continue to rise until March 2021. The reason it gives is “economic
recovery remains fragile amid risks of another pandemic resurgence leading to another round
of countrywide lockdowns”. That should serve as a sober reminder to the next president and
corporate bosses alike that, despite a rebound, there may yet be difficult days ahead for usa
Inc.