Two more tech shocks but no bear market
Despite more grim results and warnings from the American technology sector, global stock markets appear to have stabilised. Graeme Evans reports on what analysts think happens next.
7th August 2024 14:23
by Graeme Evans from interactive investor
The recession fears behind Monday’s S&P 500 index reverse were kept in focus last night after Airbnb Inc Ordinary Shares - Class A (NASDAQ:ABNB) warned of slower US demand and Super Micro Computer Inc (NASDAQ:SMCI) missed earnings hopes.
Their shares were down by double-digit percentages in today’s pre-open dealings, although for Wall Street and other global markets the mood has calmed after the earlier turbulence.
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All 11 major sector groups within the S&P 500 were higher at last night’s closing bell, boosted by the largest decline in the Vix fear index since the aftermath of the May 2010 flash crash.
While the S&P 500 opened today’s session still 7.5% from its 16 July peak, Bank of America analysts point out that pullbacks in the 5%-plus magnitude have occurred three times per year on average since the 1930s.
The bank said: “In our view, a full-fledged bear market (i.e., 20%+ drop) is unlikely. Just 50% of the signposts that historically preceded S&P 500 peaks have been triggered versus an average of 70% ahead of prior market peaks.”
It adds that a 10% correction takes place once a year on average, the last time being in autumn 2023. Bear markets have historically occurred once every three to four years, with the last one from January to October 2022.
The bank said: “Despite rising recession concerns on softer economic data, our economists expect a soft landing, do not expect recession-sized interest rate cuts and forecast the first cut in September.”
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More than 80% of the S&P 500 by market capitalisation has now reported quarterly results, with the majority delivering a positive earnings surprise for the period.
Notable exceptions have included Intel Corp (NASDAQ:INTC), which suspended its dividend after admitting that second-half trends were more challenging than expected. The shares of server company Super Micro also slumped last night as it posted a fourth-quarter margin decline to 11.2% from 15% in the previous three months.
Across the financial year, record demand for AI infrastructure fuelled a 110% jump in revenues to a record $14.9 billion and earnings per share surge of 87% to $22.09.
It said it is well positioned to become the largest IT infrastructure company as investments in Malaysia and Silicon Valley strengthen its supply chain and deliver “economies of scale necessary for the growing AI revolution”.
The company, which joined the S&P 500 earlier this year, also announced plans for a 10–for-1 stock split on 1 October.
The setback for Airbnb’s Nasdaq-listed shares came as it reported shorter booking lead times globally and some signs of slowing demand from US guests.
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In the current quarter it expects to deliver revenues of $3.67 billion to $3.73 billion, representing year-over-year growth of 8% to 10%. The guidance follows a strong second quarter as revenues rose 11% to $2.75 billion and a margin of 20% led to net income of $555 million. It generated $1 billion of free cash flow in the period.
Despite some softening in the recent earnings data, UBS Global Wealth Management said the US results season still pointed to S&P 500 profit growth between 11-12% in the second quarter.
The bank forecasts 11% earnings growth across 2024 and 8% in 2025, underpinning its base case for the S&P 500 to finish the year at 5,900 and reach June at 6,200.
UBS continues to expect a soft landing for the US economy: “Corporate profit margins remain solid, suggesting that companies have little reason to commence job cuts.
“June retail sales and personal consumption expenditure data suggest consumer spending is normalising from an elevated level, not deteriorating. Households are in good financial shape overall, with positive real income growth and average debt servicing costs that remain low relative to historical averages.”
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