Chip shares tumble on geopolitical concerns

US equities closed mixed on Wednesday amid a significant selloff in chip and AI-related companies. The S&P 500 fell 1.4%, and the Nasdaq 100 dropped 2.8% following Biden's threats of expanded trade restrictions on China. Nvidia, Qualcomm, AMD, and other tech shares saw significant declines. In contrast, the Dow Jones rose by 243 points to a record high, boosted by UnitedHealth's 4.4% rally after strong earnings. Meanwhile, European equities closed lower as the Eurozone’s Stoxx 50 declined 1.1%, weighed down by ASML's over 11% plunge due to concerns over US sanctions related to its chip sales to China. EssilorLuxxotica fell 4.5% after a major acquisition, while banks and Adidas showed resilience in the downturn.

Summary for 18.07.2024

Asian equities fell, led by technology and chipmaking shares, amid fears of new US trade restrictions on China. Japan's Nikkei 225 dropped 2.1%, with Tokyo Electron sliding over 8%. Broader Asian markets also declined due to concerns over US-China tensions and profit-taking from record highs, despite hopes for US interest rate cuts.

European equity markets are expected to open mixed on Thursday, with investors holding back as they await the European Central Bank's upcoming monetary policy decision. Meanwhile, in the US, equity index futures are showing a rise, suggesting a stable market open following recent declines in chipmaking shares and amid increasing expectations of early Federal Reserve interest rate cuts.

Oil prices rose on Thursday, supported by a larger-than-expected decline in US crude inventories of 4.9 million barrels. The market was buoyed by prospects of interest rate cuts in the US and Europe, which could boost oil demand. A weaker dollar, making oil cheaper for holders of other currencies, also contributed to the increase.

In the US, Federal Reserve Governor Christopher Waller hinted at potential rate cuts as the economy approaches conditions favourable for easing, contingent on sustained inflation decline. Robert Kaplan suggested a September rate adjustment due to inflation progress, clarifying it wouldn't initiate a broader easing cycle.

United Airlines anticipates lower-than-expected profits for the current quarter, citing challenges despite robust summer travel demand. The airline plans to cut capacity amid increased competition and lower airfares, aiming to bolster pricing power in response to higher operating costs. United's adjusted earnings for the June quarter exceeded analyst expectations.

Johnson & Johnson exceeded expectations in Q2 with strong sales from drugs like Stelara and Darzalex, despite impending biosimilar competition. Shares rose on positive earnings, but challenges include biosimilar impact on Stelara sales and ongoing legal issues related to talc products, influencing investor sentiment.

US Bancorp reported a 10% decline in adjusted profit for Q2 due to reduced net interest income, impacted by higher deposit costs and sluggish loan demand amid rising interest rates. The bank's net interest margin contracted to 2.67%. CEO Andy Cecere noted stable credit metrics but acknowledged challenges in lending profitability. Shares rallied by 4.5% nonetheless.

Daimler Truck's shares fell 1.7% after weak Q2 results, with Mercedes-Benz EBIT 26% below consensus and a €120 million impairment in its China JV. Stifel maintains a ‘buy’ with a €58 target; Jefferies holds ‘buy’ but lowers target to €52, citing Mercedes' challenges and guidance review. They anticipate industry recovery could support a potential re-rating.

Shares of Eli Lilly & Co. and Novo Nordisk fell 3% and 4.2%, respectively, following positive Phase 1 results from Roche's oral GLP-1 receptor agonist CT-996 for obesity treatment. Roche reported significant placebo-adjusted weight loss in participants, impacting competitors in the obesity treatment market despite early-stage data requiring further validation.

EssilorLuxottica has acquired streetwear brand Supreme from VF Corporation for $1.5 billion, marking its first foray into apparel. The deal also includes an 80% stake in Heidelberg Engineering, expanding into ophthalmic diagnostic solutions. VF Corp gained over 8% in response, while EssilorLuxottica shares fell nearly 4% in Paris.

Bank of America raised Microsoft's price target to $510 from $480, citing robust Azure cloud performance and early Copilot traction. They anticipate Azure's year-over-year growth at 31.5%, driven partly by AI workloads, exceeding initial estimates. Strong Office 365 and Copilot adoption are expected to boost Productivity and Business Processes segment revenue, supporting a Buy rating with a focus on FY25 growth potential.

Bank of America Securities and BMO Capital Markets both raised Alphabet's price target to $206 and $222, respectively, reflecting optimism ahead of Q2 earnings. Bank of America anticipates $70.9 billion in revenue and $1.91 GAAP EPS, driven by AI advancements and cost efficiencies. BMO highlights a 13.5% Search growth and expects boosted YouTube revenue from reduced TikTok ad spend and AI enhancements.

Morgan Stanley upgraded Apple to their top pick, projecting robust iPhone shipments of 235 million in FY25 and 262 million in FY26, buoyed by Apple Intelligence enhancements. They set a $273 price target, foreseeing substantial upside. In contrast, UBS expects June 2024 revenues of $84.6 billion, warning of challenges in smartphone demand and pricing, maintaining a cautious "neutral" stance with a $190 target.

HSBC downgraded Qualcomm to Hold, citing a lack of catalysts and tempered expectations for its AI PC narrative. Despite a slight target price increase to $200, HSBC expects Qualcomm's Q3 FY24 results to meet consensus but anticipates challenges in Q4 FY24 due to lower handset revenue and margin pressures. The firm lowered EPS estimates for FY24 and FY25 amidst uncertainties in the smartphone market and AI CPU shipment projections.

Morgan Stanley analysts suggest Rivian could pivot towards becoming an auto and tech supplier rather than solely focusing on EV manufacturing, citing potential stability and profitability benefits. They raised Rivian's stock price target to $17, highlighting partnerships like the one with Volkswagen as crucial for leveraging technology and reducing operational costs.

Goldman Sachs warns of an imminent S&P 500 correction, citing historical indicators and market dynamics. They highlight 17th July as historically marking the end of a bullish period, with heightened volatility expected due to option expirations and reduced liquidity amid summer vacations. The note advises against buying the dip, emphasising risks posed by concentrated gains in top equities and slowing passive inflows.

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