Alphabet's (GOOG 0.31%) (GOOGL 0.43%) Google is the biggest ad platform in the world, and the origin of almost all of the company's $1 trillion in market value.

Google has been an unquestionable juggernaut since its founding in 1998. But now the company -- or at least its U.S. ad revenue -- looks set to experience its first annual decline. According to data from eMarketer, the digital research firm, Google is expected to see U.S. ad revenue decline by 4% for the year, or 5% when including traffic acquisitions cost. That compares to a forecast of 5% growth in U.S. ad revenue for Facebook (META -0.33%), and the research firm expects Amazon, the #3 digital advertiser, to see growth as well.

Google is particularly vulnerable to the coronavirus crisis because it counts on travel giants like Expedia and Booking Holdings for a substantial percentage of its revenue. Those companies have drastically pulled back on ad spending due to plunging travel demand, and even see long-term changes in ad spending on Google as the search giant becomes a direct competitor.

But it's not just travel. Businesses across the board are pulling back on spending, which explains why even Facebook is only forecast to see modest growth, compared to an expectation of more than 20% before the crisis began; the forecast for Google was initially similar. eMarketer expects U.S. digital advertising to grow by just 2% this year, while it sees TV ad sales declining 15% and print falling 25%. Overall, the research firm expects the U.S. ad market to shrink by 7% in 2020.

Books with different Google doodles

Image source: Google.

Where's that V again?

In recent weeks, investors have responded to favorable data indicating that areas like the housing market, retail spending, and even the labor market were experiencing a "V-shaped recovery." That's helped lift stocks close to pre-pandemic levels, while the tech-heavy Nasdaq has returned to all-time highs.

However, advertising, a huge industry responsible for hundreds of billions in revenue, is highly correlated with the overall health of the economy, and ad spending tends to track with economic contractions and expansions. After all, advertising is something an act of faith, with businesses spending on marketing in the belief that it will drive more demand. The pullback in advertising this year seems to indicate that businesses don't see the kind of demand that would warrant normal levels of marketing spending. That may be because some industries like travel and restaurants are still in various states of shutdown, or because they're wary of a lack of demand -- or because business is too unpredictable, which is also reflected in the number of companies pulling financial guidance. However, consumer spending drives 70% of the economy in the U.S., and the eMarketer numbers show that consumer spending is unlikely to return to prior levels until at least next year. Remember, the pandemic didn't really start until mid-March, so those forecasts include roughly 2.5 months of a healthy economy. 

Challenges for the ad giants

If the eMarketer forecast is accurate, analysts also seem to be overestimating growth at Alphabet and Facebook. Currently, the analyst consensus calls for Alphabet's revenue to increase 4.3% this year to $168.9 billion. The company does not break out revenue by region, so we don't know how revenue growth in the U.S., its biggest, most mature market, compares to growth in the rest of the world. However, ad revenue from Google made up close to 75% of the company's total revenue in the first quarter, so the rest of its business would have to deliver roughly 35% revenue growth for the year for the consensus forecast (including eMarketer's) to be accurate. That seems unlikely given modest growth in its hardware business and potential ad challenges at YouTube. In April, CNBC reported that Google was planning to cut its own marketing budget by as much as half for the second half of the year and implement a hiring freeze in some departments, a sign the company was expecting a significant shortfall in revenue.

At Facebook, the analyst consensus calls for 9.7% revenue growth; ad revenue in North America made up about half of its total last year. If eMarketer's forecast is accurate, Facebook will struggle to hit that mark -- nearly all of its revenue comes from advertising, and much of the world is experiencing some impact from the pandemic.

Facebook recently hit an all-time high and Alphabet is just a few percentage points from setting one. However, both companies face substantial challenges in returning to former levels of growth in their ad businesses. While the two digital ad giants will be fine over the long term, the market still seems to be ignoring the impact of the crisis on the ad businesses and therefore the broader economy as a whole. Investors should keep an eye on growth at both companies, as the economy won't recover until the ad market does.