My conclusions so far from the early start of the 3Q24 earnings season are banks have excelled, semiconductor companies have been mixed, and luxury has suffered. Even with this backdrop, US stocks have again powered to record highs.
All six of the largest US banks have now served up surprisingly better results than had been expected. All have recorded earnings beats albeit sounding cautious on the outlook. Of course, providing cautious guidance these days – similar to saying that a recession is just around the corner – is like the boy crying wolf. Time will tell if largely dismissing such warnings will prove to be a mistake.
Although banks have been a bright spot, chip-related companies have been more mixed in spite of the ongoing hype associated with AI demand as a driver. ASML, which served up weaker-than-expected results and a cautious outlook, got hammered last week after inadvertently releasing its weak third quarter results one day too early. It was a good lesson in what is driving chip demand, because it is clearly not one-way (AI-fuelled) traffic. As luck would have it, I started building a position in ASML earlier this year as a proxy play for AI, thinking that NVDA had gotten over it skies as far as valuation and was therefore too risky to add (further). However, ASML’s results showed just how cautious and uncertain some end markets remain, especially for many industrial and automotive companies that are deferring investment in new manufacturing equipment, including semiconductors and related manufacturing machinery. The lesson here is that the enthusiasm over chip demand is strong because of hype over AI, but not everything chip-related will automatically benefit from AI. ASML’s poor results and cautious guidance was a harsh reminder that the value-chain for chips includes a significant amount of rudimentary semi-conductors used for “more boring” and traditional purposes.
The luxury-related sector also suffered at the beginning of the week, with LVMH delivering poor results, splattering other luxury-goods stocks. Ongoing weak demand from China has certainly been a key contributor to the sale of luxury goods sputtering. Moreover, the exact plans for Chinese government stimulus remain far from clear, throwing more caution to the wind.
In spite of earnings variability, risk markets overcame these headwinds to generally post solid gains on the week, with US stocks hitting more record highs and US Treasury yields stabilising.
WHAT MATTERED LAST WEEK
The ECB reduced its policy rates 25bps at Thursday’s monetary policy meeting, and signalled that further rate reductions are ahead. European stocks were better on the week (Euro STOXX 600 +0.6bps). The 10y German bund yield was 5bps lower, and the Euro weakened to US$1.087/€1.00.
As mentioned in the opening section, semi-conductor bellwether ASML missed numbers after accidentally releasing its third quarter numbers a day early, dragging down the entire chip value-chain with it. However, aside from ASML, most semi-conductor stocks recovered their losses, with TSMC’s results later in the week (strong results and a solid beat) adding upside momentum. Both NVDA and TSMC closed the week near their all-time highs.
NFLX served up surprisingly strong 3Q24 numbers across the board after the close on Thursday and raised its fourth quarter guidance. The stock was up 11.1% on Friday following the earnings release to $763.89/share, a record high. AAPL also reported better-than-expected sales of the new iPhone 16, boosting its stock price.
China started the week with CPI figures coming in below expectations, as the country’s (relatively speaking) lethargic economy continues to struggle. Later in the week, the government released 3Q24 GDP figures, which not surprisingly feel short of the government’s target of 5%/annum (at 4.6% YoY). However, growth was slightly better than analysts were expecting. China also formally began one component of its stimulus plan, comprised of an 800 billion Yuan package that included funding for banks to support the stock market and to buy unsold houses.
Bank earnings continue to impress, with GS, MS, BAC and C delivering better-than-expected results for the most recent quarter. The benchmark KBW bank index is now up 5.9% during the last six trading sessions, starting the day before JPM and WFC released their earnings on October 10th.
Gold hit another record high this week, with oil prices faltering.
On Thursday, the Census Bureau released stronger-than-expected US retail sales data for September, illustrating the ongoing strength of the US consumer in driving forward the resilient US economy. Retail sales in September were up 0.4% MoM and 1.7% YoY.
CPI in the UK fell more than expected in September, opening the door for the Bank of England to be more aggressive in its monetary policy easing. Retail sales were stronger than expected in the UK in September, firming up the outlook for the UK economy – even as growth slows – as Labour prepares to release its budget on October 30th, certain to contain a series of tax hikes for Brits (and those of us living there).
Yen fell back below ¥150/US$1.00, as expectations for a stronger Yen continue to fade. Japanese stocks were down 1.6% on the week.
MARKETS LAST WEEK
Global equities were generally better, with US stocks in particular again reaching record highs (S&P 500 and the DJIA). Chinese stocks were volatile but ended slightly better on the week, with the FTSE 100 serving up a solid week, too.
US Treasury yields were stable, little changed on the week.
Corporate credit all-in yields were better as credit spreads continue to tighten in both investment grade and high yield.
In currencies, the U.S. Dollar was stronger on the week as the speed of policy rate reductions looks to have gained steam in the Eurozone and UK vis-à-vis the US. Sterling was little changed, and the Euro was weaker. Gold hit another record high, surging above $2,700/oz on Friday and holding on to the gains. Bitcoin was also better bid on the week. The price of oil fell this week, as tensions in the Middle East seemed to abate, at least to the oil junkies. The situation in the Middle East still looks highly unpredictable and volatile from my seat!
MY TRADES LAST WEEK
I rolled my S&P 500 puts from December to March and raised the strike price. I also sold small amounts of AAPL and BRK, both concentrated positions in my personal portfolio. These trades provided more downside protection, but also took some money off the table as AAPL and BRK reach – or flirt with – record highs. The sales – and perhaps others to come in the next week – are also designed to get in front of the likelihood of higher capital gains tax in the UK, a near-certainty in the new budget.
WHAT’S AHEAD
Economic data this coming week looks slightly light in the first half of the week. In the second half of the week, we get preliminary ISM PMI data for the US, UK and Eurozone for October. CPI for Japan will drop on Thursday. Consumer confidence reads in the UK and US will also be released late in the week. Throughout the week, there will be various speeches and engagements by Fed and Bank of England officials.
Earnings: 112 S&P 500 companies report earnings next week, including GM, VZ, T, BA, KO, IBM, and the first of the Mag 7 companies, TSLA (Weds Oct 23rd). For the record, four of the Mag 7 companies report the following week, including AAPL, AMZN, META and GOOG. NVDA, which has a quarter ending Oct 31 (rather than Sept 30), reports its earnings on Nov 20.
IMF meetings are taking place this week in Washington DC, running Oct 21-26.
Monetary policy meetings:
ECB: Dec 12
Bank of Japan: Oct 30/31 and Dec 18/19
FOMC: Nov 6/7 and Dec 17/18
Bank of England: Nov 7 and Dec 19
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