Market Reacts to Earnings Amid Political Uncertainty

Major US indices declined on Tuesday, 23 July, dragged lower by energy and utility stocks as investors parsed through subpar earnings reports from Alphabet (GOOG) and Tesla (TSLA). 

Bond yields also fell on Tuesday, with the 10-year notes decreasing by 0.9 basis points to 4.251% as the market moved past earlier gains from US President Joe Biden’s announcement that he would not seek re-election.

Some stocks had traded higher after President Biden endorsed Vice President Kamala Harris as the Democratic nominee. Still, many uncertainties remain, including the upcoming midterm elections. 

Investors have become more cautious in light of recent political events and the Federal Reserve's expected rate cuts in September. They are waiting for GDP and inflation data on Thursday, 25 July and Friday, 26 July, respectively, for clues on the outlook for interest rate cuts.

Tech Earnings Kick Off on Poor Footing

Some stocks fell on Tuesday, partly due to disappointing earnings from tech giants Tesla and Alphabet. This may have led to concerns that tech stocks might be too richly valued overall, dampening risk appetite.

Tesla shares fell more than 8% after it reported profits plunging 40% year-on-year (YOY) due to price cuts on its electric vehicles (EVs) and increasing competition. The company reported adjusted earnings of 52 cents per share, far below analysts' expectations of 61 cents per share and 91 cents per share in the same quarter of 2023. Meanwhile, Tesla’s CEO Elon Musk has supported US Presidential candidate Donald Trump's 2024 campaign. It plans to contribute $45 million monthly to a political action committee to soften Trump’s stance on EVs.

After initially falling on the results, Tesla's stock pared some of its losses as investors considered the impact of the $622 million restructuring charge related to layoffs earlier in the year. Excluding this charge, EPS would have been closer to 66 cents and operating profit $2.2 billion, up from the previous quarter.

Despite Alphabet beating revenue and profit targets, the market's high expectations meant that even a modest earnings beat couldn't push its stock higher. Revenue rose 14% YOY, driven by search and cloud, with ad revenue of $64.62 billion, showing that Google's advertising business continues to grow. CEO Sundar Pichai highlighted the company's progress in artificial intelligence (AI) and generative AI. However, YouTube ad revenue missed estimates due to increased competition from TikTok, though it still grew to $8.66 billion compared to $7.66 billion in the year-ago quarter.

Market sentiment had already been negative, with tech stocks generally facing scrutiny. This may have contributed to shares slipping in after-hours trading, as observed in the broader context of Nasdaq (US-TECH 100) futures sliding.

Nominee Kamala Harris Brings Hope

Joe Biden's decision not to run for re-election had an immediate positive reaction in stocks, reflecting an unwinding of the "Trump trade," which had presumed inflationary tariffs and tax cuts necessitating higher interest rates. 

The nomination of Kamala Harris might lead to increased spending on social programs, healthcare, and renewable energy, and it might negatively impact fossil fuels, banking, and healthcare. As a result, stocks that had rallied on the prospect of another Trump presidency, notably energy stocks, fell.

In fact, a recent Reuters/Ipsos poll found that Harris now leads Trump by two percentage points, showing that she had 44% support compared to Trump's 42% as some voters saw her as “mentally sharper” than both Trump and Biden. 

While Harris' economic policy record is limited, experts say she would likely continue Biden's policies and even favour tech due to her ties to significant firms from her time as a California prosecutor. Other experts note that the stock market movements in response to the changing election outlook are likely to be short-term and that economic factors will play a larger role.

Focus Remains on US Data 

In that vein, GDP and inflation data will be released this week. Economists expect stronger GDP growth and stable inflation, which could keep interest rate cut expectations in place. 

The advanced estimate of second-quarter GDP growth will be released on Thursday, 25 July, and is expected to come in at 1.7%. However, some analysts expect a stronger figure closer to 2.5%, driven by better consumer spending, rising inventories and slightly stronger investment readings.

The core PCE deflator for June, the Fed's preferred measure of inflation, will be released on Friday. It is expected to come in at 0.2% month-on-month (MOM), consistent with the Fed's target of 2% and may keep interest rate cut expectations in place.

According to a Reuters poll of economists, the Fed is expected to cut interest rates twice this year in September and December in response to easing inflation, depending on upcoming data releases, including GDP and PCE inflation figures. Nonetheless, while inflation has declined, resilient consumer demand warrants a cautious approach to rate cuts. (Source: Reuters)

Conclusion

The recent decline in major US indices, driven by disappointing earnings from tech giants Tesla and Alphabet, highlights growing concerns over tech valuations and competitive pressures. Biden's resignation and subsequent nomination of Harris has also introduced a new level of political uncertainty, which could lead to increased market volatility.

As investors assess broader economic factors like corporate earnings growth and interest rates, the short-term focus may remain on GDP and inflation data on Thursday and Friday, respectively, to gauge the next stock market moves.