The release of half-year business results from the largest technology companies has resulted in an escalation of the ‘cooling’ of their overheated stock valuations. Although the price correction for some stocks is already on the brink of a ‘bear market’ (a drop of more than 20 percent), financial analysts assess that a market-wide plunge into the abyss will not occur. As reported by Reuters this week, the preliminary reports from American and European companies have shown that business results are generally in line with expectations.
Data from LSEG shows that the quarterly earnings per share (EPS) of American companies that have reported results so far have increased by 12 percent year-on-year. This is the strongest quarterly growth in the last ten quarters. Earnings of European companies have strengthened by four percent, according to preliminary results, which is slightly better than analysts’ expectations. However, it is much more important that this is the first profit growth since 2022. However, for the current levels of stock prices, results in line with expectations are actually – disappointing.
‘Withdrawal’ to China
Some companies, particularly in the consumer goods sector, are feeling the effects of high interest rates that increasingly impact personal consumption, as well as the slowdown of the Chinese economy. For example, McDonald’s reported its first global sales decline in three years, of one percent. It ‘blamed’ this result on the economic weakness of China. Unilever, Visa, and Aston Martin also cited China. Given the high levels of the major stock indices, even the slightest indication of a slowdown in business is enough for a sell-off.
For instance, the American S&P 500 has strengthened by 14 percent this year, but has been on a downward trajectory since mid-July, during which it lost four percent of its value. The technology Nasdaq fared even worse – compared to its record value of 18,647 points achieved on July 10, this index is now worth 17,147 points, eight percent less. Regarding the ‘old continent’, the European STOXX 600 index has recorded an eight percent increase this year, but is currently down 1.3 percent compared to its peak value from early June.
Marin Onorato, a partner at the alternative investment fund management company Mathematica Capital Partners, commented on the results of American and European companies so far, stating that markets are always one or two steps ahead and expectations are very high. – For the next quarters, companies in the S&P 500 are expected to see earnings growth of over 15 percent. Monthly and quarterly data show that American personal consumption has weakened in the last two quarters, and there is also a visible increase in the unemployment rate. Therefore, it will not be easy for companies to achieve double-digit growth, even though margins are at above-average levels – explains Onorato.
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Technology stocks faced a new blow on Tuesday with the release of Microsoft’s results. The software giant, which many consider a leader in the race for artificial intelligence application, saw its stock price drop by 0.9 percent to $422.92 ahead of its quarterly results announcement. After the market closed, the stock price plummeted by seven percent, wiping out $340 billion in market capitalization. Investors were not satisfied that Microsoft reported higher revenue than expected, at $64.7 billion or 15 percent more than last year. Additionally, earnings per share reached $2.95.
Better is not good enough
Investors were primarily disappointed by the revenue from the company’s most important segment, Intelligent Cloud, which generated $28.52 billion in revenue in the second quarter, slightly below the expected $28.7 billion. There is also concern over a 78 percent jump in capital expenditures to $19 billion, which Microsoft explained as necessary to expand data center capacity to meet demand for artificial intelligence services. This indicated that the payback period for significant investments in artificial intelligence will take much longer than previously thought.
Marin Onorato comments that very often after the release of business results, the stock price behaves contrary to what would be intuitive because actual expectations are somewhat different. – A good example of this is yesterday’s Microsoft results, which were better than expected (revenue growth of 15 percent and net profit growth of 10 percent), but the stock price fell seven percent immediately after the results were announced. Of course, the overall market sentiment plays a role here. I believe that expectations from tech giants are higher than those reflected in public services (as shown by price movements after announcements) and that they need to deliver even better results to justify the current valuation – asserts Onorato.
He adds that in the perception of the average investor, stocks have practically not been able to fall for almost two years, only to rise. – In economic cycles, there have always been optimistic periods, but also overly optimistic ones that end with certain corrections. Although large tech companies have achieved excellent results in the last few quarters, expectations and stock prices have risen accordingly. In the last month, however, we have seen that prices can also fall, with the biggest winner of this cycle, Nvidia, dropping over 20 percent from its peak and dragging Nasdaq down nearly ten percent. I think the decline can continue to bring valuations closer to historical levels, but I believe that longer negative trends in the market must have some event or series of events in the real economy that then ‘cool’ investors – assesses Onorato.
With the results of other tech giants, such as Nvidia, the further direction of the stock market will be determined by this week’s meeting of the US Federal Reserve. Investors expect concrete confirmation that the first interest rate cut will occur in September.
