07/29/2024

We leave behind a fairly mixed week for the world's stock markets, with US indices advancing at a slower rate than their counterparts in the Old Continent. In fact, Wall Street was unable to shake off a week full of earnings results. In certain instances disappointing, which cast a shadow over stock trading at high valuations. The usual seasonal pattern of volatility has seemed to arrive. In the last 3 sessions of last week, the VIX rose by more than 20%, above 18 points. The ongoing sector rotation and negative news flows in terms of the business results campaign is leading the operators to fine-tune options prices.

The decline of major tech companies hit the headlines again this week, weighed down by the steepness of the curve in the US and also by certain business results that were poorly received on Wall Street, such as those of Alphabet or Tesla. This week will also be dominated by the business results of major companies. They will most likely continue to show robustness, although the high expectations generated in recent months could be their main Achilles heel.

The decline in the Technology sector, including Nvidia, took place despite news that the company could once again avoid the new restrictions imposed by the US Administration on States the sale of products to China. TSMC was another stock that fell sharply during the week, dragged down by the global performance of the Technology sector and the impact of Typhoon Gaemi, which closed the Taipei stock exchange for two days.

As for the business results presentation campaign in the US, just over 30% of the S&P 500 companies have reported their results so far, and the percentage of positive surprises remains above the historical average in EPS (74.2% versus 73.3% average) and well below the historical average in revenues (46.2% versus 54.2% average). The consensus is now estimating a rise in EPS of 10.5% YoY, 1 pp more than estimated at the beginning of the campaign. However, the results are not being well received due to the unsatisfactory relevant results of tech giants and consumption. The letdown of Alphabet's or Tesla's results contributed to the technology sector's fall, which will be attentive next week to the highly significant results of AMD and Microsoft, Meta, Apple, Intel and Amazon, among others. Meta could also become the main focus of the week, as it is facing its first EU fine, accused of antitrust breach over ad-supported services due to linking Facebook Marketplace to its social network.

Tesla exceeded revenue expectations and improved Q223 figures year-on-year, in spite of earnings declining by 45% and the profit margin dropping from 11% in the second quarter of 2023 to 5.8% in the second quarter of 2024; neither of both figures met the expectations of analysts. In addition, Tesla delayed the presentation of the Robotaxi to October. Alphabet, on the other hand, surprised on the upside with a rise in net profit of 28.6% YoY, mainly as a result of its cloud business and advertising revenues increasing by 11%. However, Alphabet's results were received with concern, as revenue from the cloud business disappointed and showed weakness against its competitors (Microsoft and Amazon being the main competitors). Alphabet also asked investors to remain patient before their AI investments show a greater positive impact on their accounts.

The consumer sector also brought disappointment, which however was mainly offset by the expectations of the Fed's next rate cuts and by certain economic data still showing resilience. This negative sentiment was led by Visa, Whirpool, Pool Corporation, American Airlines —with a guidance cut— and Ford Motor —presenting worse results than expected due to higher warranty repair costs—. In positive terms, some companies stood out, such as Harley Davison and IBM, which saw an improvement in the AI business.

As for the business results presentation campaign in the Old Continent, just below 20% of the EuroSTOXX companies have reported their results so far, and the percentage of positive surprises remains below the historical average in EPS (47.4% versus 56.6% average) and well below the historical average in revenues (40.4% versus 52.1% average). The consensus is now estimating a rise in EPS of 15.95% YoY, 1 pp more than estimated at the beginning of the campaign. This is the highest year-on-year increase since the third quarter of 2022 and the first positive variation since the first quarter of 2023.

Thus far in this campaign, negative surprises stood out in the Luxury sector (LVMH and Kering, announcing a profit warning), which is also one of the most severely hit in recent months due to the subdued economic growth in China and the fear of being harmed in a trade war. Nestlé reassessed its sales forecast for the year, finding complications in offsetting the lower price increases with higher volumes. Stellantis also declined as its profits plummeted in the first half of the year. Along these lines, Mercedes Benz Group stood out due to its sharp drop in electric vehicle sales and the lower demand in China.

In the technology and semiconductors sector, partially aggravated by the bad news from the US, the negative figures posted by BE Semiconductor Industries also stood out, following its announcement that the orders for the second quarter were below the expectations of analysts.

In a positive sense, Roche Holding and Sanofi are worth a particular mention. The former's valuation rose on the back of its profit forecast for 2024, with new drugs, such as Vabyism for eye diseases, driving revenue in the last quarter and first half of the year. Sanofi's stock also increased after raising its profit forecast for the year.

In the short term, the key to the performance of the markets, and equities in particular, will remain dependent on the technology sector, which after accumulating a very positive performance, could continue to digest the significant annual trend amidst the current strong sector rotation and very high valuations. We will see to what extent the operators adjust their expectations in the short term. In any case, the scenario remains favorable for both equities and fixed-income: although certain results have not satisfied investors, we must remember that we are in an environment of robust aggregate returns. The easing of monetary policies will act as a significant catalyst in the medium term, in the midst of a mild adjustment of economic growth.

We therefore maintain our constructive position without changes one more week, with the expectation that our of soft landing scenario will continue to unfold, which will favor the good performance of equities and, especially, fixed-income.