After a challenging week in the stock market, optimism has returned as investors shift their focus to the tech earnings season. This renewed interest has driven significant rebounds across major indices, highlighting the resilience of the tech sector amid market fluctuations.
Tech Earnings Fuel Market Rebound
Stocks rebounded after their worst week since April as investors looked beyond political uncertainties to focus on the start of the tech earnings season. The megacap space rallied, with the Nasdaq 100 up 1.5%. Despite the recent slump that had some on Wall Street bracing for a summer correction, respondents to Bloomberg’s Markets Live Pulse survey expect earnings to reinvigorate the S&P 500. With results from Tesla Inc. and Alphabet Inc. on deck Tuesday, nearly two-thirds of the 463 respondents to the questionnaire expect corporate profits to boost US equities.
Sky-high valuations and seasonal weakness have incited some pullback warnings, with traders also facing political uncertainties. Yet the market reaction to recent political developments has so far been fairly muted, with the US dollar little changed and Treasuries marginally higher.
“This political shake-up shouldn’t materially alter the direction of the markets,” said Tom Essaye at The Sevens Report. “The ultimate direction of the S&P 500 will still be determined by economic growth.”
The S&P 500 rose to 5,550. A Bloomberg gauge of the “Magnificent Seven” megacaps climbed 2.5%. Tesla Inc. and Nvidia Corp. each added 4%. CrowdStrike Holdings Inc. tumbled 11% amid the continued fallout from a faulty software update from the cybersecurity firm. The Russell 2000 of smaller firms fell 0.1% after last week’s surge.
Treasury 10-year yields slid two basis points to 4.22%. Investors will also be focused this week on US economy readings, especially the Federal Reserve’s preferred inflation gauge for clues on whether the central bank will be able to slash rates in September.
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 Fed rate cuts and the threat of more trade restrictions on chipmakers.
Still, the recent outperformance of US small caps is facing technical resistance and lacks fundamental drivers to carry on for a longer period of time, according to Morgan Stanley’s chief US equity strategist Mike Wilson.
“While we’re respectful of still light sentiment/positioning in small caps, we see limited fundamental and macro justification for small cap outperformance continuing in a durable manner,” Wilson and his team said in a note to clients.
Hedge funds aggressively cut risk across their long and short books and at the fastest pace since January 2021, according to a note by Goldman Sachs Group Inc.’s prime brokerage desk.
From a net flow perspective, last week’s notional net selling in US single stocks was the largest since March 2022. Nine out of 11 sectors were net sold — led by information technology, health care, financials and energy.
Prospects of a Republican win in November’s presidential election may invoke small-cap “animal spirits,” but that is likely to be short-lived, according to Morgan Stanley’s Lisa Shalett.
“We prefer the resilience of large caps to small caps — bottom line,” she wrote.
The S&P 500 just exited what’s historically been its best two-week stretch of the year in the first half of July, and is approaching its most challenging stretch in August and September.
Profit estimates for the S&P 500 in the second quarter haven’t been cut as much as they normally have, according to JPMorgan Chase & Co. strategists, a sign that there’s little room for disappointment this earnings season. A team lead by Mislav Matejka said usually projections fall by 5% in the three months before results, but this time it’s been about 1%.
The “market is trading near highs, with full positioning and extreme concentration, suggesting that there is not much scope to absorb any disappointments,” they wrote.
The five biggest US technology companies are facing tough comparisons with the 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, when growth for the group ranged from 44% to 49%. The overall message from Wall Street: Expect results to show the companies are still booming, but not to the extent seen last year.
Corporate Highlights
- Verizon Communications Inc. reported operating revenue that missed analysts’ estimates as fewer people upgraded wireless equipment.
- The bulk of McDonald’s Corp. US restaurants will extend the burger chain’s $5 meal deal in a bid to attract budget-strapped diners.
- Delta Air Lines Inc. apologized for canceling thousands of flights during the busiest travel weekend of the summer as many of its systems failed following a catastrophic CrowdStrike Holdings Inc. IT outage.
- Ryanair Holdings Plc cut its outlook for ticket prices in the crucial summer travel period and said fares will be “materially lower” as consumers grow more cautious, adding to pessimism that the post-pandemic rebound in flying is fizzling.
- Berkshire Hathaway Inc. has sold off another block of BYD Co. shares, taking its stake in one of the world’s biggest carmakers to under 5% from more than 20% two years ago.
Key Events This Week
- Eurozone consumer confidence, Tuesday
- US existing home sales, Tuesday
- Alphabet, Tesla, LVMH earnings, Tuesday
- 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 price index, University of Michigan consumer sentiment, Friday
Conclusion
The tech sector’s earnings season has injected a renewed sense of optimism into the stock market, with significant rebounds across major indices. Despite potential political and economic uncertainties, the focus remains on corporate profits and economic growth as key drivers for market direction. Investors are keeping a close eye on upcoming earnings reports and economic indicators to gauge the future trajectory of the market.
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