Trump winning the election could spell real trouble for ad agency profits in Q4
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If Donald Trump becomes the president of the United States in November, US advertising agency networks could see a dent to their profits in the fourth quarter of this year.
Ian Whittaker, an analyst at Liberum, thinks a Trump win will result in a "short, sharp shock" to US ad spending.
Advertising agency group profits are very heavily weighted towards the fourth quarter of the year — Whittaker estimates something like 40% of agency groups' profits land in this quarter. North America is the most important geographical area for advertising holding companies in terms of profit.
Media agencies — the agencies that help clients plan where they should be spending their ad budgets — generate the biggest margins for advertising networks (compared to creative agencies, PR, research, and so on), so a drop in ad spending will immediately translate to a dip in profits.
"A lot of media work takes place in the fourth quarter. Advertisers often decide, when they come to the end of the year, to look at their surplus [budget] and spend that on ad hoc projects," Whittaker said. "If there is a Trump victory you might get a short, sharp shock in terms of confidence and advertisers might not spend on that ad hoc project work."
If those advertisers don't decide to spend in the last quarter of the year, it doesn't tend to get shifted to the first quarter of the following year. It just won't get spent at all — and media agencies won't be able to take their cut.
But why would a Trump presidency lead to a drop in confidence among advertisers?
Whittaker thinks that while Hillary Clinton is seen as the continuity candidate, a Trump win would signal change.
He said: "Trump has interesting proposals on business: If you don't employ in the US, you'll get penalized with the tax system; he's made speeches on trade and seems anti-free trade. A lot of businesses would get worried by that, [a Trump government] could tear up the trade proposals on the table at the moment. So they may be inclined to freeze their spending, take the cautious approach, and decide they're not going to spend their cash."
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