S&P 500 Rally Stalls as Earnings Season Picks Up: Markets Wrap

This content was published on July 23, 2024 - 20:29

8 minutes

(Bloomberg) — Stocks struggled to gain traction as traders waded through a deluge of corporate results for clues on whether the market will be able to extend this year’s record-breaking advance.

Following its biggest rally since early June, the S&P 500 fluctuated. United Parcel Service Inc. — an economic barometer — headed toward its largest-ever plunge on a profit miss. Tesla Inc. and Alphabet Inc. are due to kick off the “Magnificent Seven” earnings season after the close. Companies will have to impress as expectations are elevated, especially for megacaps. Though still robust, their numbers are projected to slow.

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“Given that profit expectations are high for the ‘Magnificent Seven,’ these companies will have a lot to prove when they report results,” said Anthony Saglimbene at Ameriprise. “At the same time, their outlooks will likely be heavily scrutinized in comparison to elevated valuations.”

Upbeat earnings would be a much-needed driver for equities after a roaring first half of the year. The market is facing pressure heading into a seasonally weak period, with volatility likely to be heightened by the US presidential election. Secret Service Director Kimberly Cheatle stepped down after taking responsibility for failures at a campaign rally where former President Donald Trump was shot.

The S&P 500 hovered near 5,565. A gauge of the “Magnificent Seven” underperformed the Russell 2000 of small firms. Apple Inc. rose as “The Information” said the company is moving forward with a foldable iPhone. Southwest Airlines Co. fell on news it’s facing heightened scrutiny by US regulators over a series of flight safety incidents involving the carrier.

Treasury yields edged lower after a solid $69 billion sale of two-year notes — which underscored market bets on rate cuts. Oil slumped as futures hit key technical levels, spurring a bout of algorithmic selling.

After driving the rally in US stocks for most of the year, big tech slammed into a wall last week. Investors rotated from high-flying megacap shares to riskier, lagging parts of the market, spurred by bets on Federal Reserve rate cuts, the threat of more trade restrictions on chipmakers and concern that the hype around artificial intelligence may be overblown.

“Google-parent Alphabet and Tesla will probably grab the most eyeballs, and their numbers will also represent a big test for the ‘Magnificent Seven’ following a significant amount of rotation out of that heavyweight club since the last consumer inflation report,” said Arthur Hogan at B. Riley Wealth.

Analysts will likely press Tesla on the progress of its plans for robotaxis and delve into the details of Alphabet’s revenue boost from artificial intelligence.

The five biggest US technology companies are facing tough comparisons with stellar earnings cycles of the past year. Profits for the group are projected to rise 29% in the second quarter from the same period a year earlier, data compiled by Bloomberg Intelligence show. While still strong, that’s down from the past three quarters and, to investors, the stock reaction to earnings remains one of the biggest wild cards.

“The fact that these stocks have experienced weakness leading up to their earnings reports isn’t necessarily such a bad thing as rallies into earnings would only have the potential to set the bar unrealistically high,” said Bespoke Investment Group. “It doesn’t take a gymnast to know that the lower the bar, the easier it is to get over it.”

“We expect the earnings season to bolster confidence in the equity market,” said Solita Marcelli at UBS Global Wealth Management. “While markets could be choppy in the near term, after a period in which investor positioning had become overextended, we believe fundamentals remain strong.”

While investors are concerned about a sustained selloff in US technology megacaps, Barclays Plc strategists say a robust earnings outlook means the cohort is still attractive after the recent rout.

The team led by Venu Krishna raised its year-end target for the S&P 500 Index to 5,600 points from 5,300, citing solid profit expectations for big tech.

“While our valuation assumption for big tech is high, growth-adjusted multiples are reasonable and we expect the group to earn into its valuations,” they said.

Bank of America Corp. clients were big sellers of US stocks as the S&P 500 posted its worst week since April, with outflows led by institutions and hedge funds as mom-and-pop investors were small net buyers.

Last week, BofA clients sold a net $7 billion of US equities, the largest exit since November 2020, quantitative strategists led by Jill Carey Hall said Tuesday. Technology stocks saw their first outflows since May.

Corporate Highlights:

Coca-Cola Co. raised its full-year outlook as higher prices bolstered the soft-drink giant’s performance.
Kimberly-Clark Corp., the owner of the Kleenex brand, reported quarterly sales that trailed estimates, partially driven by retailers lowering their stocks of the company’s bath tissue and intensifying private-label competition.
Philip Morris International Inc. raised its forecast for annual profit growth on higher demand for its Zyn nicotine pouches, as enthusiasm for tobacco alternatives rages on.
Comcast Corp. reported second-quarter revenue that missed analysts’ estimates, dragged down by a slower season at its movie studios and theme parks.
General Motors Co.’s profit surged 60% from a year ago, easily beating Wall Street’s expectations on strong demand for gas-powered trucks in the US.
LVMH sales growth slowed last quarter as wealthy shoppers reined in spending on pricey Louis Vuitton handbags and Dior couture.
ASM International NV’s orders beat estimates in the second quarter, as the Dutch chip-equipment maker continues to benefit from the artificial intelligence boom and demand from China.
Logitech International SA raised its outlook for the year after the company reversed post-pandemic sales declines and posted its second straight quarter of revenue growth.
Medline Industries Inc. is exploring an initial public offering that could value the medical supplies giant at as much as $50 billion, people familiar with the matter said.

Key events this week: