Stocks Plunge on Disappointing Tesla and Google Earnings News and Chip Weakness

The S&P 500 Index ($SPX) (SPY) today is down -1.62%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.97%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -2.60%.

Stocks are trading sharply lower on disappointing earnings reports late Wednesday from Tesla (TSLA) and Alphabet (GOOG), along with reduced optimism about AI.  In addition, European stocks were undercut by disappointing results from LVMH Moet Hennesy Louis Vuitton, which saw a sharp drop in sales in China, and Deutschebank, which said it would likely cancel plans for a stock buyback later this year.

Stock investors will continue to focus on tech stocks, with key earnings reports on tap for next week.  Tesla (TSLA) and Alphabet (GOOG) were the first of the Magnificent Seven to report earnings, with their reports late Wednesday.  Mag 7 companies reporting next week include Microsoft (MSFT) on Tuesday, Meta (META) on Wednesday, and Apple (AAPL) and Amazon (AMZN) on Thursday.  Nvidia (NVDA) is expected to report earnings on August 28. 

The market consensus is that Q2 earnings for the S&P 500 companies will rise +9% y/y.  About one-quarter of the companies in the S&P 500 have reported thus far, and the majority have beaten their earnings forecasts, according to Bloomberg.

Today’s US economic reports were weak and were negative for the US economy, although they were at least dovish for Fed policy. 

The preliminary-July S&P US manufacturing PMI fell by -2.1 points to 49.5, which was substantially weaker than expectations of unchanged at 51.6.  The US manufacturing PMI fell below the expansion-contraction level of 50.0 for the first time since December 2023, indicating weakness in the US manufacturing sector.  By contrast, the preliminary-July S&P US services PMI rose by +0.7 points to 56.0, stronger than expectations for a -0.4 point decline to 54.9.

June US new home sales fell by -0.6% to 617,000, weaker than expectations of a rise to 640,000.  Home sales are being undercut by high mortgage rates and high home prices. 

The markets are looking ahead to Friday’s PCE deflator report for an update on when inflation may have fallen by enough to allow the Fed to proceed with a rate cut.  The PCE deflator is the Fed’s preferred inflation measure.  The consensus is that Friday’s June PCE deflator will ease to +2.4% y/y from May’s +2.6%, and the June core PCE deflator will ease to +2.5% y/y from May’s +2.6%.  The expected PCE deflator reports of +2.4% y/y (headline) and +2.5% y/y (core) would represent new 3-1/4 year lows for both measures, which would give the Fed more confidence that inflation will continue to move lower towards its +2% inflation target.

The markets are discounting the chances for a -25 bp rate cut at 7% for next week’s FOMC meeting on July 30-31 and 100% for the following meeting on September 17-18.

Overseas stock markets are lower.  The Euro Stoxx 50 today is down -1.09%.  China’s Shanghai Composite closed down -0.46% for the third consecutive decline.  Japan’s Nikkei Stock 225 Index closed down -1.11%.

Interest Rates

September 10-year T-notes (ZNU24) today are up +5.5 ticks.  The 10-year T-note yield is down by -3.3 bp at 4.217%. T-note prices are seeing support from weak US economic reports and increased safe-haven demand with today’s sharp sell-off in stocks.  T-note prices are also seeing support from a decline today in the 10-year breakeven inflation expectations rate by -0.4 bp to 2.271%. 

T-note prices are being undercut by supply pressures amidst this week’s Treasury auctions, although the markets took Tuesday’s 2-year T-note auction in stride.  The Treasury will auction $30 billion of 2-year floating rate notes and $70 billion of 5-year T-notes today, and $44 billion of 7-year T-notes on Thursday.

European government bond yields are higher.  The 10-year German bund yield is up by +0.5 bp at 2.444%. The 10-year UK gilt yield is up +2.1 bp at 4.146%.

The preliminary-July Eurozone manufacturing PMI fell by -0.2 points to 45.6, weaker than expectations for a +0.3 point rise to 46.1.  The preliminary-July Eurozone services PMI fell by -0.9 points to 51.9, which was weaker than expectations for a +0.1 point increase to 52.9.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 87% for the September 12 meeting.

US Stock Movers

Alphabet (GOOG) is down more than -4%.  Alphabet’s earnings were positive relative to market expectations, but there was disappointment about weakness in YouTube and high capex from AI spending.

Tesla (TSLA) is sharply lower by more -11% on disappointment about its earnings report, which was released after Wednesday’s close. Tesla’s auto profits and margins were disappointing.  Also, Tesla postponed the unveiling of its autonomous taxis by two months until October.  Tesla’s automotive gross margin fell to 14.6% in Q2 from 16.4% in Q1 due to falling auto sales and pricing, rising capex, and restructuring charges from mass layoffs.  Cowen analyst Jeff Osborne said Tesla the earnings report showed that Tesla was “Big hat, No cattle,” and, “Given the hype cycle the past few weeks around AI, we would expect shares to retrace the recent rally as nothing new was offered around progress with AI.”

Chip stocks are leading tech stocks lower even though Texas Instruments (TXN) is up +0.4% after reporting in-line Q2 results and guidance that fostered confidence that its revival is progressing.  Qualcomm (QCOM), Broadcom (AVGO), and KLA (KLAC) are down more than -4%.  NVIDIA (NVDA), Lam Research (LRCX), Marvel Technology (MRVL), ASML (ASML), AMD (AMD), and GlobalFoundaries (GFS) are down more than -3%.

Visa (V) is down more than -3% after its quarterly revenue slightly missed Street estimates.

Blackstone Mortgage Trust (BXMT) is down more than -9% after cutting its dividend by 24% as its commercial mortgage loan portfolio worsened with defaults and late payments, which had negative implications for other REITs that focus on commercial property.

AT&T (T) is up nearly +5% after reporting a larger-than-expected number of new mobile-phone subscribers in Q2.

Earnings Reports (7/24/2024)

AT&T Inc (T), Amphenol Corp (APH), CME Group Inc (CME), Old Dominion Freight Line Inc (ODFL), International Paper Co (IP), Westinghouse Air Brake Technol (WAB), Roper Technologies Inc (ROP), Fortive Corp (FTV), General Dynamics Corp (GD), GE Vernova Inc (GEV), Interpublic Group of Cos Inc/T (IPG), Boston Scientific Corp (BSX), Thermo Fisher Scientific Inc (TMO), Fiserv Inc (FI), Allegion plc (ALLE), NextEra Energy Inc (NEE), Otis Worldwide Corp (OTIS), TE Connectivity Ltd (TEL), Teledyne Technologies Inc (TDY), Lamb Weston Holdings Inc (LW), Ford Motor Co (F), Chipotle Mexican Grill Inc (CMG), O’Reilly Automotive Inc (ORLY), Molina Healthcare Inc (MOH), Waste Management Inc (WM), Republic Services Inc (RSG), International Business Machine (IBM), Align Technology Inc (ALGN), KLA Corp (KLAC), ServiceNow Inc (NOW), Newmont Corp (NEM), United Rentals Inc (URI), Globe Life Inc (GL), Tyler Technologies Inc (TYL), Teradyne Inc (TER), Invitation Homes Inc (INVH), Rollins Inc (ROL), Ameriprise Financial Inc (AMP), Universal Health Services Inc (UHS), Edwards Lifesciences Corp (EW), Las Vegas Sands Corp (LVS), Raymond James Financial Inc (RJF).

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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