A Tale of Two Cities: ISM vs S&P Global Readings

TL;DR

Economic slowdown affects both big and small companies, as small companies are customers of big companies and average consumers are customers of both. Service sector PMI shows weakness, but it varies between big and small businesses.

Transcript

I caution people in thinking that somehow big companies are going to be immune to an economic slowdown because small companies are big customers of large companies and the average consumer who's not on the upper end are customers of big companies and if you look at Google's advertising business or Facebook's advertising business a lot of their cust... Read More

Key Insights

• 😃 Economic slowdown affects both big and small companies due to their interconnected customer base.
• 🐕‍🦺 The service sector PMI reflects weakness, but the disparity between different surveys highlights the difference in sample size and representation.
• 😃 Bigger companies have advantages in navigating challenges such as labor costs, access to raw materials, and overseas shipments.
• 😃 Equity markets show a divide between big and small cap stocks, with valuation discrepancies reflecting the impact of economic slowdown on different companies.
• 🇨🇷 The cost of living crisis, fueled by rising energy costs and growing wage requirements, poses challenges to SMEs and may force bigger companies to sacrifice profit margins.
• 😥 The impact of energy prices on the US economy is mixed, with certain sectors benefiting while others face pain points.
• 👨‍💼 Gradual energy price increases are more manageable for households and businesses, but sudden spikes create difficulties.
• 😀 Europe is facing both a sharp increase and higher absolute energy prices, while the US has experienced more gradual changes.

Questions & Answers

Q: Why are big companies not immune to economic slowdown?

Big companies are not immune to economic slowdown because small companies are their customers, and the average consumer, who is not on the upper end, is also their customer. Their customer base includes small companies, like those utilizing Google's or Facebook's advertising services, as well as companies with less than 25 people, such as those using Amazon's web service business.

Q: What explains the divergence in sentiment between small and large businesses in the service sector?

The divergence in sentiment between small and large businesses in the service sector can be attributed to the different surveys conducted. The ISM survey focuses on big companies, while the S&P Global survey includes small, medium, and larger businesses. This difference in sample size and representation affects the accuracy of the sentiment measurements.

Q: How do equity markets react to the sentiment divide between small and large companies?

Equity markets already show a divide between big and small cap stocks. Big cap stocks, trading at higher multiples, may appear immune to economic slowdown, but this is not the case. Valuation discrepancies exist between growth and value, as well as big and small companies. Economic slowdown affects all companies, regardless of their size.

Q: At what point will the cost of living crisis become an issue for bigger companies?

Bigger companies may have to sacrifice profit margins to navigate the cost of living crisis, whereas small and medium-sized enterprises (SMEs) face potential business survival challenges. Rising expenses in necessities like energy and food, coupled with wage demands, create a cost pressure for SMEs. Bigger companies may have to face earnings hits but are less likely to face existential threats.

Summary & Key Takeaways

• Economic slowdown affects big and small companies because small companies are customers of big companies and average consumers are customers of both.

• Service sector PMI reveals weakness, but the divergence between the S&P PMI and ISM non-manufacturing service PMI reflects the difference in surveys, with ISM focusing on big companies and S&P encompassing businesses of all sizes.

• The impact of economic slowdown varies between big and small companies, with bigger companies better able to navigate challenges due to factors like labor costs, access to raw materials, and overseas shipments.