Why market fall after Q2 2024 earning report?

It might surprise most investors, US stock across board reverse to fall after Q2 earning reports.

Table of Contents

Consumers have begun to frugal

Whether in China or the United States, consumers in the world’s two largest markets have begun to cut back on spending for different reasons. In the past few years, especially because of the inflation faced by the world, which has caused various prices to soar, consumers have given up on big splurges such as dining in restaurants or traveling, and have become more cautious with their money.

In the United States, even as inflation slows, many consumers are still feeling the cumulative impact of years of rising prices for essentials like groceries, high borrowing costs and sharply increasing insurance costs, adding to budget pressures.

Faced with the double blow of weak consumption in the Chinese and American markets, many multinational companies issued warnings of weak sales and lowered profit expectations when announcing their second-quarter results. These companies span various industries and are quite representative of consumer behavior. The more famous listed companies include Procter & Gamble, PepsiCo, McDonald’s, Nike, Starbucks, Mercedes-Benz, Heineken, Disney, Airbnb, Hilton, etc.

Companies have been laying off employees

Amid the boom in the stock market with the accumulation of artificial intelligence, investors have forgotten that companies around the world have been laying off employees. All well-known companies have been laying off employees continuously in the past two or three years, almost without stopping. In Silicon Valley in the United States alone, more than 100,000 jobs were laid off in the first half of this year.

According to a Morning Consult survey of approximately 4,400 Americans, nearly one-third of respondents said their companies have changed their travel policies, most commonly reducing the frequency of travel and reducing the number of traveling employees. In terms of number of people, 54% of companies are reviewing their travel expenses more carefully. The most commonly axed programs include corporate team bonding trips, trade shows and incentive travel.

Amid economic uncertainty, the U.S. Treasurer’s top priority is cost cutting. Cost-cutting efforts have become the top priority for financial chiefs of U.S. listed companies.

Semiconductor stocks fell across the board

In the past six months, the biggest change in the U.S. stock market is that “Semiconductors have replaced software and have become the mainstream investment in the U.S. technology industry.” “So far in 2024, four semiconductor companies have contributed one-third to the increase in the S&P 500”, which has also given birth to Many “Industries and Manufacturers Benefiting from the Artificial Intelligence Trend”

Semiconductor stocks have dominated the rise in U.S. stocks over the past two years, especially those benefiting from artificial intelligence chips such as Huida, Advanced Micro Devices, Broadcom, and TSMC.

However, starting from July, the market began to reverse, and semiconductor stocks fell across the board. Semiconductor stocks plummeted, and the decline was worse than other industries.

Earning reports are indeed not as good as expected

Except for a few companies, such as Apple (ticker: AAPL), Meta (ticker: META), PayPal (ticker: PYPL), Shopify (ticker: SHOP) and MercadoLibre (ticker: MELI), most of the US listed companies have Second-quarter financial reports were generally poor.

The worst thing was that Intel (ticker: INTC) fell 26% the day after its second-quarter financial report was released. It continued to fall by more than 6% the next day, and fell 38% in five days. It also shockingly suspended dividends. Its market value is less than US$81.2 billion.

What’s more important: Most companies’ financial forecasts are disappointing, exacerbating market concerns, which is more lethal to stock prices than the results of quarterly earnings reports that have already occurred.

AI capital expense angers investors

Leading large U.S. technology stocks released financial reports. The annual profit growth rate of these companies in the second quarter has dropped to nearly 30% from 50% in the previous quarter. Analysts expect annual profit growth to slow further in the third quarter to around 17%.

Capital expenditures by technology giants including Alphabet, Amazon, Microsoft, and Meta totaled nearly $60 billion in the second quarter, an increase of two-thirds year-on-year, and a large part of it went to Huida.

The total capital expenditures of the four giants in the first half of the year exceeded 100 billion US dollars. In the first half of this year, Microsoft, Google, Amazon and Meta’s capital expenditures increased by 50%, with the total capital expenditures exceeding 100 billion US dollars, reaching 106 billion US dollars, setting an unprecedented high.

A large part of these investments is used to support the construction of infrastructure for artificial intelligence. And these investments look to be just the beginning. Both Google and Meta have pledged further investment over the next 18 months. Market analysis predicts that at the current rate of investment growth in technology companies, artificial intelligence-related investments by large technology companies may more than double by the end of this year.

Financial report data shows that each giant invests more than 10 billion US dollars in capital every year. Barclays’ report states that capital expenditures in the AI field are expected to reach a cumulative US$167 billion from 2023 to 2026, and this figure is based on optimistic expectations for demand for AI products. However, in stark contrast, cloud services are expected to generate only $20 billion in incremental revenue by 2026.

Recession indicator triggered

The United States officially triggered the Sahm Rule, a 100% accurate economic recession indicator, on August 2. U.S. stocks plummeted that day. The following Monday, global stock markets plummeted across the board, and U.S. stocks continued to plummet. Since the stock market is a leading indicator of the economy, the continuous plummeting of U.S. stocks exactly reflects the current situation of the U.S. economy.

For details about Sahm Rule, please see my post of “Sahm Rule, a 100% accurate recession indicator, was triggered“

The Fed is almost ready to cut interest rates

Concerns about an economic recession mainly come from weak economic data in the first week of August, including the weak U.S. non-farm payrolls report on August 2. In addition, the Fed Chairman revealed in a public statement on July 31 that he hinted at the possibility of an interest rate cut in September.

Buffett sells half of Apple stock

Berkshire Hathaway announced its second-quarter financial report on the 3rd and sold 49.4% of its Apple shares, which also brought Berkshire’s cash reserves to a record high of US$276.94 billion.

Affected by this news, Apple fell 4.82% on Monday. Apple is the listed company with the highest market value and is a component of the three major U.S. stock indexes, which also affects the direction of U.S. stocks.

To quote Elon Musk’s view on this matter, he believes that Buffett’s influence is basically the same as that of the Federal Reserve.

Please note: according to “Powerful and persuasive Buffett indicator, whether market is overheat“, the stock market has clearly reached an extreme level of overheating since last year.

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