Black Wednesday: Markets Strain
On a turbulent Wednesday, financial markets in the United States and Europe saw significant drops, with the S&P 500 and Nasdaq indices plummeting to almost two-month lows. The underperformance of tech giants like Tesla and Alphabet, Google's parent company, has exacerbated ongoing fears about the state of the technology sector and artificial intelligence's future. Adding to this bleak picture, luxury goods firm LVMH also issued a grim financial report, prompting further concern about the overall economic landscape.
The alarm bells were rung loud and clear as the latest earnings reports from two prominent American tech companies failed to meet expectations. Investors had high hopes for Tesla, but on that fateful Wednesday, the electric vehicle manufacturer’s stock took a nosedive, tumbling more than 12% and resulting in an $80 billion loss in market value. The company cited declining vehicle prices and restructuring costs as major factors contributing to its disappointing second-quarter earnings, marking its lowest profit margin since 2019. Alphabet wasn't spared either; its shares dropped 5% as YouTube’s advertising growth slowed despite continued high levels of capital expenditure on artificial intelligence.
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In a client report, D.A. Davidson highlighted that Tesla and Alphabet's latest performance has intensified anxiety among investors regarding the dominance and trajectory of major tech stocks, which have often been the engines driving the U.S. stock market to repeated record highs over the last couple of years. The Philadelphia Semiconductor Index followed suit, hitting nearly 5% lower, with stocks like Broadcom, Qualcomm, Nvidia, and TSMC facing steep declines. The market’s spotlight now shifts to the upcoming earnings from Apple, Meta (formerly Facebook), and Microsoft in the forthcoming week.
Financial advisors at Charles Schwab indicated that the reports from tech giants may incite a reevaluation of corporate spending in technology. In recent weeks, many institutions have begun reassessing some tech company ratings, and while expectations around artificial intelligence remain high, the market's reaction may prove to be more volatile. Given the uncertainty looming over the tech sector, it seems that the market's risk of volatility might not have completely subsided.
Across the Atlantic in Europe, LVMH’s cautionary announcement regarding a slowdown in business added to the woes in the fashion segment. The world's largest luxury goods conglomerate revealed that consumer spending constraints are limiting sales growth, with a 1% year-on-year decline in revenues to €41.7 billion during the first half of the year, and net profits falling by 14% to €7.27 billion.
This downturn adversely affected European luxury stocks; Kering and LVMH both fell by over 4%, while Hermès and Pernod Ricard dipped by 2.4% and 1.8%, respectively. In London, shares of Burberry plummeted by 2.1%. Earlier, Hugo Boss had forecast a 1% drop in second-quarter sales to €1.02 billion, alongside a significant 42% decline in EBIT, which decreased to €70 million. CEO Daniel Grieder noted, in a statement, that the company is grappling with a period of severe global macroeconomic uncertainty, which impacted their second-quarter results.
Moreover, Burberry previously opted to cancel its quarterly dividend, lowering profit expectations while announcing a change in leadership. Jonathan Akeroyd resigned from his post as CEO—an agreement made with the board—and he will be succeeded by Joshua Schulman, the former CEO of Michael Kors, marking the fourth chief executive for the British fashion house in only a decade. Burberry’s share price has plummeted more than 50% in the past year.
Commenting on the recent market fluctuations, Steve Clayton, head of stock funds at Hargreaves Lansdown, remarked, “The midterm earnings season has commenced on both sides of the Atlantic, and thus far, investor sentiment has not been favorable.”
Meanwhile, the dismal outlook in the commodity markets continues. The prevailing uncertainty in macroeconomic conditions has triggered concerns among market participants. The eurozone composite PMI dropped significantly from 50.9 in June to a mere 50.1, now precariously close to contraction territory. Germany unexpectedly slipped back into contraction after four months, while France’s economy, dragged down by a sluggish manufacturing sector, drifted further away from expansion.
This trend supports the European Central Bank's recent assessment; last week, it revised downward its economic growth outlook and anticipated continued declines in inflation. Amid expectations of weakened demand, commodities are under considerable downward pressure. International crude oil futures hit a new low on Wednesday not seen since June. During the session, U.S. oil fell below the $77 mark. Ipek Ozkardeskaya, a senior analyst at Swiss bank, pointed out that expectations for OPEC to begin easing production restrictions in the fourth quarter and the growing likelihood of increasing U.S. production if Trump were to be re-elected has intensified concerns over supply surplus.
On the commodity exchange, September copper futures saw a drop of 1.2%, closing at $4.11 per barrel, marking an eighth consecutive trading day of decline, the longest streak since February 3, 2020. Copper prices have plummeted 20.5% from the historic highs reached in May, joining aluminum in a technical bear market.
Various factors have led to a reversal in the trajectory of the global economic “barometer.” The copper inventory registered at the world's three major exchanges exceeded 500,000 tons, alongside the absence of stabilization signals in the global manufacturing sector, and considerable challenges brought about by the impending U.S. elections on multiple demand fronts. Demand growth in the renewable energy sector and electric vehicles had previously served as strong entry points for investors; however, with Republican presidential candidates like Trump leading in polls, the policies supporting the current Democratic administration may potentially be completely overturned.
Given the outlook, Carsten Fritsch, a commodity analyst at Commerzbank, noted that cyclical commodities are currently facing a broadly negative investor sentiment, with the market awaiting more definitive signals regarding consumer recovery.
Looking ahead, market themes will likely continue to revolve around the U.S. presidential election, expectations for interest rate cuts, and the unfolding earnings season. Upcoming U.S. GDP data and the Personal Consumption Expenditures (PCE) price index, set to be released in the next couple of days, could significantly influence monetary policy prospects and risk appetite. According to the Chicago Mercantile Exchange’s FedWatch tool, the probability of rate cuts in September is as high as 95%, with projections indicating over 60 basis points of cuts throughout the year.