The S&P 500 Index ($SPX) (SPY) on Wednesday closed down -2.31%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -1.25%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -3.65%.

Stocks fell on disappointing Tesla and Google earnings, weakness in chip stocks, and a +3 bp rise in the 10-year T-note yield.  

The stock market may also be showing some concern about the prospects for corporate profits after the election since Vice President Kamala Harris is polling better than President Biden and appears to have a better chance of beating Donald Trump.  Stock investors have been hoping for new corporate tax cuts, protectionist tariffs, and less regulation if Donald Trump wins the election.

Stocks on Thursday fell sharply after disappointing earnings reports late Wednesday from Tesla (TSLA) and Alphabet (GOOG), along with reduced optimism about AI in general since neither company had any ground-breaking AI news.  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.

Wednesday’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 closed lower.  The Euro Stoxx 50 closed down -1.12%.  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) on Wednesday closed down -6.5 ticks.  The 10-year T-note yield rose by +3.1 bp to 4.282%. T-note prices saw support early in the session from the weak US economic reports and safe-haven demand with the sharp sell-off in stocks.  T-note prices also saw support from a decline in the 10-year breakeven inflation expectations rate by -0.5 bp to 2.270%. 

However, T-note prices fell later in the day after former NY Fed President Dudley called for the Fed to cut interest rates as soon as next week’s FOMC meeting.  Dudley’s call rang inflation alarm bells for some investors, who fear the Fed might panic and cut rates too soon.  The result was a steepening of the yield curve on Wednesday, where short-term rates fell while long-term yields rose.  The 2-year T-note yield on Wednesday fell sharply by -6.9 bp to 4.422%, versus the +3.1 bp rise in the 10-year T-note yield.

T-note prices were also undercut by supply pressures as the Treasury on Wednesday sold $30 billion of 2-year floating rate notes and $70 billion of 5-year T-notes.  Demand for those auctions was respectable.  However, the Treasury will complete this week’s auction package by selling $44 billion of 7-year T-notes on Thursday.

European government bond yields ended higher.  The 10-year German bund yield rose by +0.5 bp to 2.444%. The 10-year UK gilt yield rose +3.1 bp to 4.156%.

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) on Wednesday fell by -5.03%.  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) plunged -12.33% on disappointment about its earnings report, which was released after Wednesday’s close.  Tesla’s auto profits and margins were disappointing.  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.  Also, Tesla postponed the unveiling of its autonomous taxis by two months until October.  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 led tech stocks lower even though Texas Instruments (TXN) saw support after reporting in-line Q2 results and guidance that fostered confidence that its revival is progressing, closing the day down -0.01%.   Broadcom (AVGO) fell by -7.59%.  NVIDIA (NVDA), ASML (ASML), KLA (KLAC), Qualcomm (QCOM), and AMD (AMD) fell by more than -6%.  Applied Materials (AMAT), Marvel Technology (MRVL), and Lam Research (LRCX) fell by more than -5%.

Visa (V) fell -4.01% after its quarterly revenue report slightly missed Street estimates.

Blackstone Mortgage Trust (BXMT) plunged -11.61% 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.  KKR Real Estate Finance Trust (KREF) on Wednesday fell -2.94%, and Ares Commercial Real Estate Corp (ACRE) fell -6.44%.

AT&T (T) rose by +5.16% after reporting a larger-than-expected number of new mobile-phone subscribers in Q2.

Earnings Reports (7/24/2024)

CBRE Group Inc (CBRE), Northrop Grumman Corp (NOC), Pool Corp (POOL), Dow Inc (DOW), Honeywell International Inc (HON), LKQ Corp (LKQ), Keurig Dr Pepper Inc (KDP), Valero Energy Corp (VLO), Masco Corp (MAS), Nasdaq Inc (NDAQ), AbbVie Inc (ABBV), RTX Corp (RTX), CMS Energy Corp (CMS), West Pharmaceutical Services I (WST), DTE Energy Co (DTE), Royal Caribbean Cruises Ltd (RCL), American Airlines Group Inc (AAL), Willis Towers Watson PLC (WTW), PG&E Corp (PCG), Tractor Supply Co (TSCO), Hasbro Inc (HAS), Dover Corp (DOV), Carrier Global Corp (CARR), Southwest Airlines Co (LUV), Union Pacific Corp (UNP), VeriSign Inc (VRSN), Eastman Chemical Co (EMN), Principal Financial Group Inc (PFG), Baker Hughes Co (BKR), Juniper Networks Inc (JNPR), Healthpeak Properties Inc (DOC), Dexcom Inc (DXCM), Edison International (EIX), Weyerhaeuser Co (WY), Mohawk Industries Inc (MHK), Veralto Corp (VLTO), Norfolk Southern Corp (NSC), Digital Realty Trust Inc (DLR), L3Harris Technologies Inc (LHX), Cincinnati Financial Corp (CINF), Arthur J Gallagher & Co (AJG), Hartford Financial Services Gr (HIG), Deckers Outdoor Corp (DECK).

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