Stocks Continue Lower on Economic Concerns and Negative Earnings Surprises

The S&P 500 Index ($SPX) (SPY) on Thursday closed down -0.51%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.20%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.06%.

US stocks on Thursday added to Wednesday's plunge, when the S&P 500 index fell -2.31% and the Nasdaq 100 index fell -3.65%.  Wednesday's plunge was driven by disappointing Tesla and Google earnings, weakness in chip stocks, doubts about when AI bets will pay off, concern about economic growth, and US political uncertainty.

Stocks continued lower on Thursday on weakness in chip stocks and on a variety of individual stock sell-offs driven by negative earnings surprises.  Also, the market continues to worry about weaker economic growth despite Thursday’s mildly stronger-than-expected US economic reports.  Stocks received some underlying support Thursday from the -2.9 bp decline in the 10-year T-note yield.

US Q2 real GDP rose +2.8% (y/y annualized), stronger than expectations of +2.0% and up from Q1's growth rate of +1.4%.  In addition, Q3 personal consumption rose +2.3%, stronger than expectations of +2.0% and up from Q1's growth rate of +1.5%.  The GDP report helped to ease market fears about reduced consumer spending and a slowing economy.  The inflation news in the report was positive, with the GDP price index easing to +2.3% from +3.1% in Q1 and the core PCE price index falling to +2.9% from +3.7% in Q1.

Looking ahead, the markets are expecting US GDP to ease to +2.0% in Q3 and +1.6% in Q4.  On an annual basis, the markets are expecting US GDP to ease to +1.8% in 2025 from an expected growth rate of +2.3% in 2024 and +2.5% in 2023.

US weekly initial unemployment claims fell by -8,000 to 235,000, which showed a slightly stronger labor market than expectations for a decline to 238,000.  Weekly continuing claims fell -16,000 to 1.851 million, showing a slightly stronger labor market than expectations for a report of 1.868 million.

US June durable goods orders plunged by -6.6%, much weaker than expectations of +0.3%.  However, the decline was mostly in the airline segment since June durable goods orders ex-transportation rose +0.5% m/m, stronger than expectations of +0.2%. June capital goods orders excluding defense and aircraft, a proxy for US corporate capital spending, rose +1.0%, stronger than expectations of +0.2% and better than May's report of a revised -0.9%.

Stock investors will continue to focus on tech stocks, with key earnings reports on tap for next week.  Magnificent 7 companies reporting next week include Microsoft (MSFT) on Tuesday, Meta (META) on Wednesday, and Apple (AAPL) and Amazon (AMZN) on Thursday.  Nvidia (NVDA) is expected to report earnings on August 28.  Tesla (TSLA) and Alphabet (GOOG) were the first of the Magnificent 7 to report earnings, with their reports late Wednesday. 

The market consensus is that Q2 earnings for the S&P 500 companies will rise +9% y/y.  About one-third of the companies in the S&P 500 have reported thus far.  The majority of reporting companies have beaten their earnings consensus, but only 43% have beaten revenue expectations, the lowest percentage in five years, according to Bloomberg.

The markets are looking ahead to Friday's PCE deflator report for an update on when inflation may have fallen enough to allow the Fed to proceed with a rate cut.  The PCE deflator is the Fed's preferred inflation measure.  The consensus is that Friday's June PCE deflator will ease to +2.4% y/y from May's +2.6%, and the June core PCE deflator will ease to +2.5% y/y from May's +2.6%.  The expected PCE deflator reports of +2.4% y/y (headline) and +2.5% y/y (core) would represent new 3-1/4 year lows for both measures, which would give the Fed more confidence that inflation will continue to move lower towards its +2% inflation target.

The markets are discounting the chances for a -25 bp rate cut at 7% for next week's FOMC meeting on July 30-31, and 100% for the following meeting on September 17-18 if the FOMC does not cut rates next week.

Overseas stock markets on Thursday closed lower.  The Euro Stoxx 50 closed down -1.04%.  China's Shanghai Composite closed down -0.52% for the fourth consecutive daily decline.  Japan's Nikkei Stock 225 Index closed sharply lower by -3.28% for the seventh consecutive daily decline.

Interest Rates

September 10-year T-notes (ZNU24) on Thursday closed up +4 ticks.  The 10-year T-note yield fell by -2.9 bp to 4.254%. T-note prices saw support from increased hopes that the Fed will cut rates soon in response to expected weaker US economic growth.

Thursday’s US economic reports were net bearish for T-note prices. Also, T-note prices were undercut by supply pressures as the Treasury on Thursday sold $44 billion of 7-year T-notes.

European government bond yields moved lower.  The 10-year German bund yield fell -2.6 bp to 2.417%. The 10-year UK gilt yield fell -2.6 bp to 4.130%.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 89% for the September 12 meeting.

US Stock Movers

Alphabet (GOOG) on Thursday fell -2.90%, while Tesla (TSLA) rose +2.06%, after the two companies on Wednesday led the US stock market sharply lower due to disappointing earnings reports.  Google on Wednesday fell -5.03% and Tesla plunged -12.33%.

Chip stocks are on the Nasdaq 100 loser board again Thursday, undercutting tech stocks and the broad market.  AMD (AMD) fell -4.36%, while ON Semiconductor (ON) and Qualcomm (QCOM) fell by more than -3%.  Lam Research (LRCX), NXP Semiconductors (NXPI), Micron Technology (MU), and Applied Materials (AMAT) fell by more than -2%.

Ford (F) plunged -18.36% on Thursday and was the second largest loser on the S&P 500 leaderboard after Edwards Lifesciences (EW), which fell -31.34%.  Ford on Thursday reported disappointing adjusted earnings due in large part to high warranty costs.

Lululemon (LULU) was at the top of the Nasdaq 100 loser board with a -9.09% loss after Citi cut its rating on the stock to neutral from buy.

Honeywell (HON) was also high on the Nasdaq 100 loser board with a loss of -5.24% after the company cut its 2024 earnings guidance. 

Royal Caribbean Cruises (RCL) fell -7.51% after its earnings report, although it became the first cruise operator to reinstate dividends following the pandemic.  Carnival (CCL) fell -5.91%.

Las Vegas Sands (LVS) fell -2.35% after its Q2 revenue missed expectations.

New York Community Bancorp (NYCB) fell -2.93% after reporting a larger-than-expected provision for loan losses.

Teradyne (TER) fell -13.30% after Q3 earnings guidance was weaker than expected.

American Air (AAL) rallied +4.32% after its earnings report. United Airlines (UAL) rose +1.61%, and Delta Air Lines (DAL) rose +1.32%.

Earnings Reports (7/25/2024)

Centene Corp (CNC), Aon PLC (AON), Charter Communications Inc (CHTR), 3M Co (MMM), Colgate-Palmolive Co (CL), T Rowe Price Group Inc (TROW), Bristol-Myers Squibb Co (BMY), Franklin Resources Inc (BEN).

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