As earnings season peaks this week, with Tesla and Google leading the way, large tech giants' financial reports will be released one after another. The uncertain interest rate cut expectations and the "AI faith" will face a major test.
The market is expected to perform well in the S&P 500 in Q2, with overall profits expected to grow by 9.7%, reaching the highest level in over two years. However, recent performance of large tech stocks has been sluggish with speculation on sector rotation taking place in the US market. The performance of large tech companies has become the focus of attention in the entire market and is crucial to global technology investors' beliefs about AI prospects.
With earnings season and seasonal factors stacking up, will there be more volatility in the US stock market?
It is generally expected that the overall earnings per share (EPS) growth of S&P 500 constituent companies in Q2 2024 will increase by 9.7% year-on-year. This will be the highest YoY earning growth rate for the index since Q4 2021 and the fourth consecutive quarter with YoY growth.
In terms of industry, 8 of the 11 industries recorded YoY growth, with four industries expected to achieve double-digit growth and outperform the S&P 500, namely: Communications Services (+18.5%), Medical Care (+16.6%), Information Technology (+16.6%), and Finance (+14.4%).
On the other hand, the three industries with the worst performance may be Materials, Industry, and Energy, with expected YoY declines of -12.7%, -3.7%, and -0.1%, respectively.
Despite the Q2 earnings season's 'seemingly robust' performance, most analysts warn of impending turbulence in the US stock market. JPMorgan analysts said that market expectations of earnings are too aggressive.
JPMorgan stated that the current expected 15% YoY EPS growth is significantly higher than the median 8% YoY EPS growth in Q4 in history. In addition, the market is trading near its high levels, with too much of a bullish position. Analysts said that "there is almost no room to absorb any disappointment."
According to RBC Capital Markets analysts, as a new earnings season begins and with the seasonal effect, there may be increasing turmoil in the US stock market. The bank's market research report shows that July is usually the strongest month for S&P 500 index performance, with an average increase of 4.26% in the last 5 years. However, in August through October, the historical performance of the US market is weaker, with September being the worst month for the S&P 500, with an average YoY decline of up to -4.23%.
In fact, according to traditional theories, there is a 'September effect' in the US stock market. According to CFRA research statistics, the S&P 500 index generally declined in August and September since 1945, with an average performance in September of being the worst, about 1.5% lower than other months.
All focus on the performance of large tech stocks, can it continue to remain strong?
As investors' confidence in the Fed is strengthened and the uncertainties of macro environments such as the presidential election increases, there is sector rotation occurring in the US stock market.
With the weakening performance of the seven giants, Communications Services (corresponding to the US industry ETF: $XLC.US$) and Information Technology ($XLK.US$) sectors that have led the US market cap index in the first half of the year have become the poorest performing sectors entering Q3. $The Communication Services Select Sector SPDR® Fund (XLC.US)$As the seven giants weaken, the communications services ($XLC$) and information technology ($XLK$) sectors that led the US stock market in the first half of the year have turned to become the worst-performing industries in Q3.$The Technology Select Sector SPDR® Fund (XLK.US)$Real estate ($XLRE$) that performed poorly before, rebounded aggressively and became the leading sector in the S&P 500 in the third quarter. Finance (
On the other hand, poor-performing Real Estate ($XLRE.US$) surged, becoming the leading sector of the S&P 500 index in Q3. Financials ($$Real Estate Select Sector Spdr Fund (The) (XLRE.US)$) is next in line. $Financial Select Sector SPDR Fund (XLF.US)$Institutions and materials followed closely. In addition, the small-cap benchmark index of the US stock market, the e-mini Russell 2000 index has begun to exert its strength, and has continued to outperform the large-cap index in recent period with impressive performance. As of now, 74% of the Russell 2000's constituent companies have earnings per share that exceed market expectations, attracting continuous inflow of funds. Under the shift of the US stock market style, the performance of large technology stocks has become the focus of attention across all market, and is crucial to global technology investors' belief in the future of AI. $Materials Select Sector SPDR ETF (XLB.US)$However, from the perspective of the consensus market expectation, the performance of the seven giants will remain very strong. Four of these companies have become the top five contributors to the profit growth of the S&P 500 index. These four companies (sorted by contribution from high to low) are
Analysts predict that the profits of these four companies in the second quarter will increase by 56.4% year-on-year. In contrast, the average profit growth rate of the other 496 companies is only 5.7%. However, the view on whether the US stock market sector will accelerate rotation is still difficult to unify on Wall Street. The bulls hope that the steady performance of stable companies will put an end to the decline of technology stocks. The UBS strategy team emphasizes a bullish view on the revenue-generating effect brought by the AI trend. The institution mentioned in the report that the impact of artificial intelligence technology on enterprise productivity and profit growth is much larger than the market generally expects. Pessimists believe that the profits of the technology industry will continue to slow down in the second half of the year, and the seven giants' profits may decrease to around 15%. The chief global strategist of Societe Generale Bank warns that the technology stock bubble in the United States may be coming to an end. The weight of US technology stocks has expanded to 35% of the total market value of the S&P 500, which is a new high since the burst of the technology stock bubble in the early 21st century, and the overall performance increase may disappoint the market.
Industry and materials came second. In addition, the small-cap benchmark index of the US stock market, the e-mini Russell 2000 index has started to gain momentum, outperforming the large-cap index in recent period with impressive performance. As of now, 74% of the constituent companies in Russell 2000 each have earnings per share that exceed market expectations, which attracts continuous inflow of funds. However, the performance of the large technology stocks in the era of style-switching of US stocks has become a focal point of attention across the entire market and is extremely important to AI's prospects for global technology investors.$NVIDIA (NVDA.US)$,$Amazon (AMZN.US)$,$Meta Platforms (META.US)$,$Alphabet-A (GOOGL.US)$.
However, in the consensus expectation from the market, the performance of seven giants is expected to remain very strong, among which four companies have also become the top five contributors to the profit growth of the S&P 500 Index. These four companies (by contribution, in order) are
Analysts expect that the profits of the four companies in the second quarter will increase by 56.4% year-on-year. In contrast, the average profit growth rate of the other 496 companies is only 5.7%. However, the Wall Street opinions on whether the US stock sector will accelerate rotation are still difficult to unify. The bullish group hopes that the stable performance of enterprises will put an end to the decline of technology stocks. The UBS strategy team emphasizes their bullish outlook on the income-generating effects brought about by the AI trend. The institution mentioned in the report that the impact of artificial intelligence technology on the productivity and profit growth of enterprises is much larger than the market generally expects. The bearish group, on the other hand, believes that the profits of the technology industry will continue to slow down in the second half of the year, and the seven giant companies’ profits may decrease to around 15%. Societe Generale Bank's chief global strategist warned that the US technology stock boom may be coming to an end. Technology stocks in the US market have expanded to 35% of the total market value of the S&P 500, which is a new high since the burst of the technology stock bubble in the early 21st century. and the overall performance increase may disappoint the market.
Please see below.
Editor/new