Bears Pull an Interception on Joblessness Worries: July 18, 2024

Equity indices started firmly in the green this morning, but a jab-cross combination of the ECB keeping rates steady and growing calls for the Fed to not trim its key benchmark until after the general election sent stocks into the red in dead-cat bounce fashion. Another cause for concern arrived from continuing unemployment claims hitting a 32-month high, which is weighing on the outlook for corporate earnings growth. Market bulls are putting up a fight, however, and are desperately looking to hang in there on the heels of the Nasdaq Composite’s worst day since 2022. Bears, meanwhile, are badly wounded but looking to capitalize on front-loaded gains amidst heavy multiple expansion during what’s traditionally been the worst-performing quarter for stocks.

Unemployment Trends Higher

The labor market softened in the last two weeks, with continuing unemployment claims rising to the loftiest level since November 2021. Initial unemployment claims, meanwhile, matched a peak from last month, which was the tallest number since August. Continuing claims increased to 1.867 million during the seven-day period ended July 6, ahead of expectations calling for 1.860 million and the prior term’s 1.847 million. Similarly, initial claims of 243,000 were greater than the 230,000 projected and the 223,000 from the previous week. Four-week moving average trends moved up for both indicators; from 233,750 and 1.839 million to 234,750 and 1.851 million, respectively.

Euro Inflation Too Hot For ECB

As expected, the European Central Bank (ECB) kept its key rate unchanged today in a unanimous vote by policymakers, but its commentary that price pressures are “still high” caught investors’ attention. Last month, the ECB lowered its key monetary policy benchmark to 3.75%. In a statement, the organization said, “services inflation is elevated and headline inflation is likely to remain above the target well into next year.” During a press conference, ECB President Christine Lagarde added that wages are still increasing at an elevated rate and productivity has declined. The combination has led to unique labor cost growth. Investors still anticipate that the ECB will cut rates twice before year-end.

Air Travel and AI Thrive Alongside Consumer Debt

Consumers’ credit card use, strong travel trends and the growth of artificial intelligence were strong themes in recent earnings calls as illustrated by the following second-quarter highlights:

• Discover Financial Services, which is a credit card company that also provides various types of checking and saving accounts, grew its second-quarter profits 70% and revenue 17% year over year (y/y). Both metrics exceeded analyst consensus expectations. The results benefited from increasing loan volumes, improved margins, an uptick in non-interest income, higher interest rates that Discover charges customers and a decline in credit loss provisions. Reward payments also contracted. Non-interest income benefited from higher loan fee revenue and loftier transaction processing volume. A facility sale and other developments also supported non-interest income. Discover also announced it reached an agreement to sell its student loan portfolio. Shares of Discover declined after the earnings announcement last night but gained roughly 3% in early trading.
• United Airlines also exceeded earnings and revenue expectations with the metrics climbing 23% and 5.7%, respectively, y/y, but its guidance disappointed investors, causing its shares to decline. In the second-quarter, the growth of basic economy and premium sales supported results. Its guidance for the current quarter fell below analyst estimates, a result of excess industry capacity weighing on fares. 
• Taiwan Semiconductor Manufacturing Co.’s (TSMC) net profit and revenue jumped 36% and 40%, respectively, y/y, with strong demand for its products that support artificial intelligence. The company raised its sales outlook after achieving better-than-expected quarterly profit, as demand for its advanced chips continued to surge amidst enthusiasm for artificial intelligence. TSMC Chairman and Chief Executive C.C. Wei says his company is working hard to meet demand, but he anticipates that a balance of customer orders and TSMC’s production capacity will occur in 2025 or 2026. Sales for internet-of-things products also climbed but the company experienced declining demand for smartphone components. Shares are down 3% in intraday trading.  
• Domino’s Pizza earnings exceeded expectations, but revenue fell below the analyst consensus with the company’s campaign to offer lower-priced options failing to get customers to cough out more dough. During the quarter, same-store sales rose only 4.8% compared to the analyst expectation of 4.9%. The revenue miss and the company’s announcement that it was retracting its guidance for new store openings caused investors to question if other forecasts may be eliminated or downgraded, resulting in Domino’s stock tanking 15% this morning. Additionally, investors were concerned that the lack of new store guidance could point to challenging times ahead for the company.
• Nokia Corp. experienced an 18% y/y decline in sales, driven, in part, by a slowdown in upgrades to 5G networks. While earnings exceeded expectations, network infrastructure and the company’s cloud and network services divisions experienced revenue declines while Nokia Technologies, which is the firm’s intellectual licensing business grew, largely due to a new contract with China-based Vivo. During an earnings call, Nokia CEO Pekka Lundmark said the year-ago quarter was a tough comparison with the company deploying 5G technology in India during the period. Mobile network providers continue to be cautious regarding the economy and deploying capital. The company expects its orders to improve in the coming months. Shares of Nokia ADR dropped nearly 6% this morning.

Tech Leads Market Decline

We’re seeing indiscriminate selling on Wall Street today as bulls fail to keep the starving bears at bay. All major US equity indices are driving south, with the Nasdaq Composite, S&P 500, Dow Jones Industrial and Russell 2000 benchmarks lower by 0.9%, 0.6%, 0.5% and 0.4%. Sector breadth is positive though, as investors rotate out of the popular year-to-date winners into other market segments. Healthcare, technology and consumer discretionary are taking it on the chin, collapsing 1.4%, 1.1% and 0.4%. Offsetting some of the pain are the energy, real estate and utilities components, which are gaining 1.1%, 0.6% and 0.5%. Treasurys are little changed, as rising joblessness and calls for the Fed to not cut rates offset each other. The 2- and 10-year Treasury maturities are trading at 4.45% and 4.17%. The dollar, however, is gaining in response to ECB President Lagarde labeling September as a live meeting despite wage pressures and lingering inflation. The greenback is up relative to all of its major counterparts including the euro, pound sterling, franc, yen, yuan and Aussie and Canadian dollars. Commodities are mixed with copper, silver and crude oil down 2.9%, 0.8% and 0.2% but gold and lumber higher by 0.2% and 1.9%.

Earnings Face Tall Bar

One issue so far this earnings season is that justifying profit multiples on stocks has become a challenge unless firms issue stellar beat and raises. Indeed, during an internal meeting this morning, Interactive Brokers Chief Strategist Steve Sosnick, a market veteran, noted that expectations for semiconductors have risen to levels that are so high it has become difficult to attract more buyers. As we dive into the meat of earnings season, investors will certainly look to punish companies that don’t post both spectacular quarterly results and breathtaking guidance. Occurring simultaneously, however, are persistent strings of weak economic data that have historically coincided with profitability declines. 

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