Tech Falls in Late Hours as Earnings Underwhelm: Markets Wrap

(Bloomberg) — The start of the “Magnificent Seven” earnings season failed to impress investors after a powerful rally that drove the US stock market to a record-breaking run.

A $290 billion exchange-traded fund tracking the Nasdaq 100 (ticker: QQQ) dropped in late hours. Alphabet Inc. retreated despite posting revenue that beat expectations. The company’s chief signaled investors will have to be patient to see concrete results from artificial-intelligence investments. Tesla Inc. slid after profit fell short of estimates and the electric-vehicle giant delayed its Robotaxi event to October.

Early Look at Magnificent Seven Earnings Fails to Impress

“Given that profit expectations are high for the ‘Magnificent Seven,’ these companies will have a lot to prove,” 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.

In regular trading, stocks struggled to gain traction amid a deluge of earnings, with the S&P 500 finishing slightly lower. A gauge of the “Magnificent Seven” underperformed the Russell 2000 of small firms. United Parcel Service Inc. suffered its worst plunge ever on a profit miss.

US two-year yields fell after a solid $69 billion auction — which underscored market bets on rate cuts. Oil slumped amid algorithmic selling and low summer liquidity.

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.

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:

• Visa Inc. reported quarterly revenue that missed Wall Street estimates — a rarity for the world’s biggest payments network.
• Texas Instruments Inc. gave an outlook for the current quarter that was in line with estimates.
• 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.
• Philip Morris International Inc. raised its forecast for annual profit growth on higher demand for its Zyn nicotine pouches.
• 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.
• Southwest Airlines Co. is facing enhanced scrutiny from US regulators over a series of recent flight safety incidents involving the carrier.
• LVMH sales growth slowed last quarter as wealthy shoppers reined in spending on pricey Louis Vuitton handbags and Christian Dior couture.

Key events this week:

• Canada rate decision, Wednesday
• US new home sales, S&P Global PMI, Wednesday
• IBM, Deutsche Bank earnings, Wednesday
• Germany IFO business climate, Thursday
• US GDP, initial jobless claims, durable goods, Thursday
• US personal income, PCE, consumer sentiment, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.2% as of 4 p.m. New York time
• The Nasdaq 100 fell 0.3%
• The Dow Jones Industrial Average fell 0.1%
• The MSCI World Index was little changed
• Bloomberg Magnificent 7 Total Return Index was little changed
• The Russell 2000 Index rose 1%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%
• The euro fell 0.4% to $1.0850
• The British pound fell 0.2% to $1.2903
• The Japanese yen rose 0.9% to 155.64 per dollar

Cryptocurrencies

• Bitcoin fell 3.9% to $65,509.96
• Ether fell 0.9% to $3,459.34

Bonds

• The yield on 10-year Treasuries was little changed at 4.25%
• Germany’s 10-year yield declined six basis points to 2.44%
• Britain’s 10-year yield declined four basis points to 4.12%

Commodities

• West Texas Intermediate crude fell 1.3% to $77.36 a barrel
• Spot gold rose 0.5% to $2,407.85 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Sagarika Jaisinghani, Jessica Menton and Tatiana Darie.

©2024 Bloomberg L.P.