China will be the theme of this quarter's earnings season

1. Eyes on China: This earnings season, prepare for a lot of talk about the Chinese economy...

Posted: Jan 7, 2019 2:59 AM
Updated: Jan 7, 2019 2:59 AM

1. Eyes on China: This earnings season, prepare for a lot of talk about the Chinese economy.

That's largely because of Apple's (AAPL) bombshell warning to investors last week, when CEO Tim Cook said the company would miss its most recent target largely because of poor sales and a slowing economy in China.

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There's some debate about whether Apple's problems in the country are company-specific, or if they point to broader issues. Still, concerns about China extend beyond Cupertino, and will probably be a hot topic during corporate earnings this winter.

After decades of expansion, China's economic engine is losing momentum. Growth in 2018 is expected to be the weakest since 1990. And the outlook for the world's second largest economy in the coming year is even worse, as the trade war with the United States and government attempts to curb runaway debt take a toll.

For the long list of global brands that have come to rely on China's massive market for growth — from General Motors (GM) to Volkswagen to Starbucks (SBUX) — that spells trouble.

Automakers are already seeing signs of danger. GM, Volkswagen, Jaguar Land Rover and Ford (F) reported late last year that sales in the country were sliding as the Chinese economy slowed and demand for big-ticket items like cars began to wane.

That's bad news for GM and Volkswagen, which now bring in more revenue from China than from the United States or Europe.

Exposure to China could also dog Tesla (TSLA), which has been cutting prices in the country just as it begins to build a factory in Shanghai.

Then there's Starbucks, which has ambitious plans to expand in China, the company's second-biggest market after the United States. The sluggish economy could hurt the coffee chain just as it needs the oomph to face down local players, and CEO Kevin Johnson will almost certainly be asked to explain the company's strategy.

Companies that produce luxury items, a distinction that in China can include Starbucks, are expected to see the biggest impact. A company such as Yum! Brands (YUM), which owns KFC and Pizza Hut, may be dealt a softer blow, according to analysts. But it could still face questions on its earnings call.

But in some cases, flagging demand in China may be a convenient scapegoat for struggling companies, according to Ed Yardeni, president of investment advisory firm Yardeni Research. For example, some analysts believe Apple overestimated how many Chinese consumers would want to pay for iPhones when less expensive alternatives dominate the market.

"Apple seemed to try to blame their disappointing results on weakness in China and [President Donald] Trump starting a trade war," Yardeni said. "But it might have something to do with the smartphone market being saturated."

2. Economic indicators: As the US economy grew steadily over the past decade, investors didn't pay acute attention to reports on housing, small businesses, inflation and the services industries. But the economy is expected to slow in 2019, and nervous investors are taking a closer look at previously overlooked economic indicators.

On Monday, the Institute for Supply Management will report on the service industry's growth last month. Last week, ISM reported that the manufacturing industry shrank by the largest amount in 10 years.

On Tuesday, the National Federation of Independent Business will report on Small Business Optimism. And the Bureau of Labor Statistics will report on inflation Friday.

3. Fed minutes: The Federal Reserve will release minutes from its December meeting on Wednesday.

That's when it raised interest rates for the fourth time in 2018, but signaled a more patient approach to raising rates this year. The decision to raises rates has sparked backlash from President Donald Trump and sent stocks sliding.

4. CES begins: The Consumer Electronics Show begins this week in Las Vegas. The annual event attracts nearly 200,000 people, stretching out across the city's convention center with booths, press events, demos and gadgets.

Attendees can peek at the future of TVs, mobile phones, the continued war between Amazon's Alexa and Google's voice assistant and tons of robots. Emerging 5G technology and artificial intelligence are expected to be the most talked-about trends on display.

5. Coming this week:

Monday — US officials in China for trade talks

Tuesday — The floor opens at the Consumer Electronics Show

Wednesday — Constellation Brands (STZ), KB Home (KBH) and Bed Bath & Beyond (BBBY) earnings; Fed minutes

Thursday — Federal Reserve Chairman Jerome Powell speaks at the Economic Club in Washington, DC; Sears returns to bankruptcy court to potentially get a decision that could determine its future

Friday — CPI reports

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