Technology Hits Turbulence
Shares of ASML#, which manufactures equipment used to make advanced semiconductors, including the processors used to power artificial intelligence, sank 6% Wednesday. The stock had plunged 16% a day earlier, giving up more than $52 billion in market value. That was after ASML’s third-quarter results mysteriously appeared online. The company later confirmed that the report was erroneously published due to what it described as a technical error.
ASML said that it expects the semiconductor chip market recovery will be more drawn out, extending well into 2025. This is being exacerbated by export restrictions to China for the most advanced semiconductor manufacturing equipment. While demand from artificial intelligence, energy transition and electrification continues, non-AI related markets are weaker, leading to customer cautiousness and some push-outs of investments. This cautious assessment spilled over into other parts of the technology sector, dragging down the stocks of other chip equipment manufacturers and suppliers. That may change as other technology company reports roll out.
Financials Flourish
Earnings reports from the financial sector this week painted a somewhat rosier picture. This week we heard from Bank of America#, Citigroup, Goldman Sachs, JP Morgan#, Morgan Stanley, and Charles Schwab#. Earnings reports were generally ahead of expectations. These companies benefited last quarter from strong trading activity, steady consumer spending trends and increased dealmaking activity.
Bank of America added one million new credit card accounts and over 600,000 checking accounts in the third quarter. However, loans were up only 1% over the prior year and the net interest margin was flat at 1.92%. Net interest income has bottomed for now, but this bears watching as interest rates decline. Goldman Sachs and Citi noted strength in their equity trading and investment banking operations. And last Friday both JPMorgan and Wells Fargo reported decent earnings, noting resilient consumer spending, a better transactional outlook, and soft-landing optimism. Finally, Morgan Stanley beat expectations, with fees from investment banking up 56% year over year, and Charles Schwab got a boost after reporting better than expected earnings and a positive outlook.
Mortgages Moribund
Total mortgage application volume fell 17% last week compared with the previous week, according to the Mortgage Bankers Association. This was led by a decline in both purchases and refinancings. Applications for a mortgage to purchase a home fell 7% for the week but were 7% higher than the same week one year ago. Refinance demand, which is most sensitive to weekly rate moves, fell 26%, but was still 111% higher year over year.
Mortgage interest rates rose last week for the third straight week, hitting the highest level since August. The average interest rate for 30-year fixed-rate mortgages increased to 6.52% from 6.36%. Rates may still be a headwind to affordability, but more supply on the market is opening up opportunities for some buyers. A year ago, mortgage rates were 118 basis points higher. Homebuyers may be less concerned about interest rates today and more concerned about the state of the economy in the coming months, and some may hold off until after the November election.
Retail Resilient
We will receive a report on retail sales for September this morning that may have been impacted slightly by at least one devastating hurricane. However, we already have an indication of where upcoming holiday spending is headed. The National Retail Federation unveiled its estimate of sales for the 2024 holiday season on Tuesday, saying it expects spending to grow between 2.5% and 3.5% from last year. That equates to between $980 billion and $989 billion in total holiday spending in November and December. That said, holiday sales growth has not been below 3.5% since 2018, before the pandemic, when spending climbed 1.8%. By contrast, 2020 and 2021 saw spending surge 9% and 12.4%, before dropping to yearly growth of 4.7% and 3.9% in 2022 and 2023, respectively.
The key takeaway from this week’s earnings and retail reports is that the consumer continues to power economic growth. Retail sales are slow but steady, borne out by recent financial company results and credit card data, while companies are returning to dealmaking. Meanwhile, investors are reminded that areas of technology can be cyclical. Against this backdrop, the path of least resistance for markets has been higher, though concerns remain that valuations are elevated versus historical averages.
Ziggy Marley turns 56 and Matthew MacFadyen (Succession series actor) turns 50.
Christopher Crooks, CFA®, CFP® 610-260-2219