The Davy Digest - 22nd July 2024

US equities struggled last week, dragged down by a selloff in tech stocks. The tech-heavy NASDAQ Composite Index sold off 2.8% on Wednesday 17th July, to post its worst day since December 2022. The selloff was sparked by speculation that the US Government is considering plans to impose more sanctions on Chinese tech firms and to increase semiconductor trade restrictions between the US and China. European equities also finished the week lower. The European Central Bank (ECB) met on Thursday and decided to leave rates unchanged. ECB President Christine Lagarde said that the question of a rate cut in September is “wide open”. Chinese equities performed poorly last week after investors were left disappointed at the lack of catalysts coming from the so-called Third Plenum, a high-level meeting of the Chinese Communist Party’s Central Committee that significantly impacts the country’s development and policies. Investors now await the release of further details in the coming weeks.

Last week's highlights

	US Retail Sales (16/07) - Unchanged in June, beating expectations,  showing resilience of the US consumer.
	ECB Meeting (18/07) – Left interest rates unchanged, Lagarde stated that the question of a rate cut in September is “wide open”.
	UK Inflation (CPI) (17/07) - Came in above forecast at 2.0%, prompting markets to reduce the odds of a rate cut in August.  UK Retail Sales (19/07) – Fell 1.2% last month, worse than expectations of a 0.4% decline.
	China GDP (15/07) - GDP rose 4.7% YoY, missing expectations of 5.1% growth. China Industrial Production (15/07) – Beat expectations, coming in at 5.3% vs 5.0% forecast.

Looking ahead to this week, in the US, the main event will be the release of Core PCE inflation, the Federal Reserve’s preferred measure of prices. The most recent inflation release in the US (June CPI) was softer than expected. Markets are currently pricing in two or three rate cuts in the US before year end. In the Eurozone, markets will be focussed on the manufacturing & services PMIs to be released on Wednesday. The Eurozone has been showing signs of an economic recovery, boosted by the European Central Bank’s interest rate cut in June. In the UK, PMIs will be released on Wednesday. Finally, in Japan, inflation figures will be released on Thursday. Japan has been suspected of intervening in recent weeks to prop up the Yen, after it reached 38-year lows versus the US dollar.

What's on the radar

	S&P Global US Manufacturing & Services PMIs (24/07) Preliminary Q2 GDP (25/07) US Inflation (Core PCE) (26/07)
	German Retail Sales (22/07) Eurozone Manufacturing & Services PMIs (24/07)
	S&P Global UK Manufacturing & Services PMIs (24/07)
	People’s Bank of China Interest Rate Decision (22/07) – Unexpected cuts to its main lending rates in a bid to support a struggling economy. Japan Inflation (CPI) (25/07)

Chart of the moment

Source: LSEG I/B/E/S as of 19/07/2024

• Q2 earnings season for the S&P 500 has started with the index expected to report 11.1% year over year earnings growth, according to LSEG*.
• Expectations are elevated, especially for mega cap tech stocks that have strongly outperformed in recent months, driven by optimism related to Artificial Intelligence.
• The Magnificent 7 is expected to see a slowdown in growth, with profits expected to rise by only 29%, compared to their average earnings growth of 35% in 2023, according to Bloomberg Intelligence.
• Companies outside of tech are expected to report their first quarterly earnings growth in at least six quarters.
• 70 companies in the S&P 500 have reported earnings so far, 80% have reported actual EPS above estimates, which is above the 5-year average of 77%.

Note: The Magnificent 7 are Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and  Tesla. *LSEG, blended growth rate as of 19/07/2024.