China warnings from top US companies ripple through Wall Street

Concerns over a slowdown in the Chinese economy hung over Wall Street on Monday as warnings from several top U.S. companies rippled through the equity exchanges.

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Industrial firms took a beating on the weaker-than-expected earnings from Caterpillar in the fourth quarter. Profits at the firm were $2.55 per share in the three months through December, below analyst expectations and underscored weakness in China.

‘We are forecasting the overall China market to be roughly flat in 2019 following two years of significant growth,” CEO Jim Umpleby told investors.

China accounts for as much as 10 percent of Caterpillar’s overall sales and the outlook sent the stock tumbling. The Deerfield, Ill.-based company was on pace for its largest one-day decrease since August 2011. At midday, it was poised to be the worst performer on the blue-chip Dow Jones Industrial Average and the second-worst performer in the broader S&P 500.

Several analysts still maintained a Buy rating on Caterpillar.

Goldman Sachs, for example, expects the stock to recover if “management is able to build comfort around mining equipment order trends” and improve margins in its construction business, possibly from price increases the firm implemented at the start of the year to mitigate President Trump’s double-digit tariffs on steel and aluminum imports.

The levies cost the company just over $100 million in the fourth quarter and, without any change in rate, will cost similarly in 2019, CFO Andrew Bonfield said.

Analysts for William Blair also warned that the construction market could be nearing a peak, leading to slower order and backlog growth in the fourth quarter.

TickerSecurityLastChangeChange %
CATCATERPILLAR INC.142.72+1.67+1.18%
BABOEING COMPANY354.09+8.41+2.43%
MMM3M COMPANY171.47+7.10+4.32%
AAPLAPPLE INC.270.71+5.13+1.93%
NVDANVIDIA CORPORATION212.17+3.43+1.64%

Caterpillar’s stock decline hit other firms like Boeing – which is heavily dependent on China for its overall sales. Shares for the Chicago-based company were down as much as 5.8 percent on Monday. It reports earnings on Wednesday.     

The stock volatility could mean another difficult year on Wall Street for the manufacturing industry. Overall, the S&P 500 Industrials Sector, which includes Caterpillar and 68 other companies, fell 15 percent in 2018. It is up 7.2 percent since the start of the year.

Chipmaker Nvidia also cut its revenue outlook to $2.2 billion, down from a prior estimate of $2.7 billion due to “deteriorating macroeconomic conditions, particularly in China.” Apple, which reports earnings on Tuesday, previously said its fourth-quarter earnings would be weaker due to a sales slowdown in China.

The Trump administration is in the midst of negotiations with China over a deal to address the trade deficit between the two countries. A Chinese delegation is expected to visit Washington, D.C., this week to continue discussions, as key areas -- like Beijing's theft of intellectual property and proper enforcement measures -- remain unresolved.

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A fuller picture of the outlook for both the Chinese and U.S. economies is expected this week after top firms like 3M Co., McDonald’s Corp., Exxon Mobil and others report earnings.