SUMMARY
Markets were volatile much of the week, influenced by mixed earnings – especially from bellwether tech giants Tesla and Alphabet (Google) – and resilient US economic data.
Earnings so far this cycle have been largely in line with expectations, but this has not proven good enough for many richly valued stocks, especially in the tech sector.
GOOG’s outlook seemed to focus investors more acutely on the timing of the much-anticipated AI earnings uplift for companies. It is increasingly clear that AI will take longer than anticipated to filter through to earnings and to the real economy, leading to ongoing selling pressure on tech stocks.
US economic data suggested that the world’s largest economy remains on solid footing and that inflation is continuing to slowly trend down towards the Fed’s target. The confluence of economic data has led most economists to forecast a reduction in the Fed Funds rate at the September FOMC meeting, but probably not at the FOMC meeting next week.
As investors flee from tech stocks, they are slowly rotating into small cap stocks which stand to benefit the most from future reductions in interest rates.
PMI data for July was mixed in the UK, Eurozone and US. In the Eurozone, composite PMI in the bloc’s two largest economies – Germany and France – disappointed, with composite PMI in both countries coming in below 50. Composite PMI in both the US and UK was slightly better than expected, with both coming in above 50.
Japanese CPI for July came in better (i.e. lower) than expected. The Yen has strengthened over the course of the last month. The Japanese stock market – the best performing YtD – was hammered last week as the Yen strengthened.
With President Joe Biden announcing last Sunday that he would not seek re-election, current VP Kamala Harris has become the front-runner, injecting youth and enthusiasm into the Presidential race. Financial markets did not seem to care. However, as the US Presidential election grows closer and the rhetoric rachets up, there is increasing political risk that could negatively influence risk appetite.
MARKETS LAST WEEK
Global equities were mixed, with the US benchmark S&P 500 and Asian indices lower. The best performing global equity market last week (tracked by EMC) was the FTSE 100 (+1.6% WoW), as investors digest decent economic news in the UK and the country settles into a Labour-led government. The worst performer was the Nikkei 225. Japanese stocks got hammered due to a stronger Yen, which has been my fear since the beginning of the year (although my timing was horribly wrong).
In US equities, around 40% of the S&P 500 companies have now released earnings, best described as mixed even though positive earnings surprises have been higher than historical averages. There continues to be selling pressure on tech stocks, which are facing valuation pressures and a realisation that AI will take longer than originally expected to contribute to earnings. The beneficiary of money leaving tech stocks has been flows into small cap stocks, with the Russell 2000 up 3.5% last week, adding to its 11.5% gain in the last month even as other indices have floundered. It appears the days of small cap stocks has perhaps final arrived!
US Treasury yields were slightly lower WoW, much of the bid coming on Friday even in spite of slightly better-than-expected economic data. As the likelihood of a reduction in the Fed Funds rate grows nearer, downward pressure on yields is stronger at the policy-sensitive shorter end of the curve. The 2y-10y negative inversion has been slowly decreasing, closing the week at -16bps, and even declining to single digits on Wednesday. As yields have fallen, the return on the intermediate total return UST index has moved into the black YtD, although the long maturity index is still nursing a loss.
Corporate credit was steady through Thursday. Gold and oil were both weaker. As the Yen strengthened, the US Dollar held its own down only marginally on the week. Bitcoin continued its recovery, gaining on the week.
WHAT MATTERED LAST WEEK
US economic data: 2Q2024 real GDP was better than expected (2.8% YoY actual, vs 2.0% expected; BEA release here), and PCE for June was in line with expectations (core PCE 2.6% YoY, BEA data here). July flash PMI data was slightly better than expected (S&P Global release here), and first time jobless claims were in line.
Earnings: 134 S&P 500 companies reported earnings last week, so now around 40% of the index components have reported earnings for the quarter. According to LSEG I/B/E/S, more companies have beat earnings consensus estimates so far than normal, but more companies have missed top-line (revenue) growth targets than normal. There was much focus last week on TSLA and GOOG, as the first two companies of the Mag 7 to report.
TSLA’s numbers were poor (margin compression and volume sales), and the much-hyped robotaxi has been pushed out again. The stock sold off – down 8.1% WoW – but remains wildly over-valued with a forward P/E of 88.5x and a price-to-sales of 8.1x. If TSLA were not meme-like, the stock would be a screaming short given the hyped valuation and poor operating trends.
GOOG generally beat across-the-board, with the only disappointment coming in YouTube advertising revenues which missed its growth target. Investors latched more onto the post-earnings analyst call with management, with the company hinting that capex will be high and AI results might take longer to fall to the bottom line. GOOG was down 6% WoW (forward P/E of 22.2x and price-to-sales of 6.5x).
PMI data in the UK and Bank of England meeting (July 30): Flash PMI data in the UK was slightly better-than-expected in July, with manufacturing PMI increasing to a 24 month high (to 51.8). Currently, futures markets are suggesting that the Bank of England will not reduce the Bank Rate at its Monetary Policy meeting this Thursday (Aug 1), while the majority of economists are expecting a reduction. The fly-in-the-ointment is services inflation, which remains elevated (5.7% YoY, services 80% of UK economy).
PMI data in the Eurozone: Flash composite PMI data in the economic bloc’s largest economies – Germany and France – both came in below 50, illustrating the pressure that both economies are currently facing. Composite PMI in the Eurozone overall came in at 50.1, suggesting virtually no growth, with manufacturing PMI well below 50 and services above 50.
WHAT’S AHEAD
Central bank policy meetings: FOMC and Bank of Japan, both July 30-31; Bank of England Aug 1. Although I suppose the BoJ could surprise and the BoE is on the fence, the Fed is expected to leave monetary policy intact at their upcoming meetings, focusing instead on the September meeting.
Earnings: An additional 171 S&P 500 companies release earnings this coming week, including Mag 7 members MSFT (Tues), META (Weds), AMZN and AAPL (both Thurs). Other well-known names that will release earnings include SBUX, AMD, INTC, PINS, ARM, QCOM, EBAY, COIN, ROKU, SQ and SNAP. Needless to say, it will be a huge week for technology companies, both large and small.
Economic data: 2Q24 GDP and flash July CPI in the Eurozone; July jobs report in the US (Friday)
MY TRADES LAST WEEK
Sold all of VWAGY, simply because I got worn down on the stock going lower and lower and lower for years, or so it felt. It’s my last play on an automotive company for “diversification”. Years of experience has taught me (finally) to never touch shares in automotive or airline companies unless there is a visible turnaround story and conviction that the bottom has been reached. It is better to buy bonds in transportation companies. I also executed long put-short (covered) call strategies on AAPL and NVDA. Lastly, I added a few shares of ASML on weakness since the stock got hammered last week, and also added to a HY leveraged loan ETF.
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