While stocks react to earnings reports versus expectations and the forward guidance from management teams, we often look for signs of inflection in earnings and the economy. Major market indices declined 1-3% yesterday, with technology shares bearing the brunt of the selloff, as second quarter earnings continue to roll out. We can let some of this week’s earnings reports speak for themselves.
Earnings Reports
Google parent Alphabet# posted a decent quarter. Revenue increased 13.6% y/y, which was slightly ahead of expectations. EPS also came in ahead of expectations. On the plus side, advertising revenue grew by 11%. Cloud revenue grew 29% and margins improved in this business as well. Momentum in Search and Cloud both benefited from new AI features. Margins expanded by 3.1% y/y and beat projections. However, YouTube revenue only grew 13%, which was below expectations. Cautious commentary revolved around tougher second half comparisons and margin headwinds from a ramp-up in capital expenditures to fund the continued AI buildout. Despite the earnings beat, the stock fell about 5% on potential headwinds.
Tesla# missed expectations for earnings in the second quarter. Earnings fell by 45% from the prior year on slower sales (auto units were down 5% y/y), added layoff costs and increased AI investment. The company also delayed its rob taxi rollout to October. Revenue came in ahead of expectations, but this was driven by a large boost from credits and strength in the energy segment. Auto margins were much weaker than expected as average selling prices for its electric vehicles continue to fall. Tesla fell about 12% yesterday.
Other companies outside of the Mag 7 have noted mixed results recently. For example, Visa# reported a 12% increase in earnings, matching estimates, while revenue increased 10%, just short of expectations. Payments volume rose 7% for the quarter while cross-border volume increased 14%. Processed transactions increased 10% overall. Visa expects a full-year earnings increase in the low teens on low double-digit revenue growth. However, the company noted pressure from lower-end consumers and a slowdown in July spending growth. Visa sold off by about 4%.
Coca-Cola# beat expectations again in the second quarter after a good first quarter report. Coca-Cola raised its organic sales growth outlook to 9-10% and increased its earnings outlook. The company mentioned that the consumer environment in North America and Europe remains generally resilient, although management noted weakness in lower-income consumers who are looking for value and leaning toward more at-home consumption. KO reacted positively to the news as other defensive stocks have done.
UPS# posted earnings below expectations due to pressure on yields and margins. UPS also narrowed its full-year 2024 guidance while lowering the consolidated operating margin guide to 9.4% (from 10.0-10.6%). In addition, fourth quarter assumptions appear ambitious to get to the new full-year forecast. The biggest change to projections came from U.S. domestic revenue per piece delivered, which is now set to decline by 1-2% in 3Q and 0-1% in 4Q. UPS still anticipates mid-single-digit volume growth as well as year-over-year declines in cost per piece, but volume growth still relies on a macro environment that remains uncertain. UPS fell by 12%.
Finally, LVMH, a high-end luxury retailer (owner of Louis Vuitton, Dior and Tiffany brands), noted that revenue grew 1 per cent on an organic basis in the three months through June, a slower pace than in the first quarter and below consensus expectations for a 3 per cent increase. This was partly due to lower demand from China. Management noted on its conference call that “this is not particularly enjoyable.” Not enjoyable indeed as the stock fell 5%.
Economic reports
The S&P Global Flash US Manufacturing PMI fell from 51.6 in June to 49.5 in July, signaling a deterioration in business conditions within the goods-producing sector for the first time since December. Levels below 50 generally signal contraction in activity. The US Services Activity Index rose to 56.0 from 55.3 in June, a 28-month high, as services activity continues to outpace manufacturing activity.
Europe’s PMI showed “near-stagnation.” The eurozone manufacturing sector was again a key source of weakness. Production was down markedly in July. A rise in services activity “stopped the overall private sector from falling into contraction.” Even so, the expansion in the service sector was only modest and the weakest since March.
Existing home sales for June came in at a 3.89 million seasonally-adjusted annual rate (SAAR), below consensus of 3.99 million, and down 5.4% from the prior year. Meanwhile, the single-family median home price of $432,000 increased 2.4% from May, and +4.1% y/y. Single-family inventory increased 3.6% m/m in units, and supply rose to 3.8 months from 3.5 in May. This inventory level remains well below the historic norm of about 6 months.
New home sales declined last month as well. Sales of new U.S. single-family homes fell to a seven-month low in June as higher mortgage rates and prices weighed on demand. Sales dropped 7.4% on a year-on-year basis in June. Though the average rate on the 30-year fixed-rate mortgage eased from a six-month high of 7.22% in early May, it remained elevated through much of June. The mortgage rate dropped to 6.77% last week. The median new house price dipped 0.1% to $417,300 in June from a year ago. It is not a surprise that lumber prices have been falling and copper prices are down 20% in the last two months.
The Magnificent Seven can only carry the market so far before we need to see breadth expand and other stocks participate. The Mag 7 stocks account for 37% of the market cap of the S&P500 Index, but only 27% of earnings. Valuations have become extended this year on rate cut expectations as well, with the 10-year yield hovering around 4.2%. Over the last two weeks, the Mag 7 names have lost more than $1.7 trillion in market value. Next week we will hear from Apple# and Microsoft#. Small cap stocks have outperformed the Mag 7 over the last two weeks and earnings for the remaining 493 companies in the S&P500 could see improving earnings results this year and next. However, the next couple of months for stocks are typically weaker seasonally, which is not magnificent.
Matt LeBlanc of Friends fame turns 57 today and Fashion icon Iman turns 69. On a musical note, Drummer Jim McCarty of The Yardbirds turns 81 and bassist Verdine White of Earth, Wind and Fire turns 73. Unfortunately, none of the original Magnificent Seven actors are around today.
Christopher Crooks, CFA®, CFP® 610-260-2219