Sector rotation send Dow to new highs

On Thursday, the US market saw mixed results: the Dow Jones hit a new all-time high, while the S&P 500 and Nasdaq slightly declined, pressured by Nvidia’s 6% drop despite strong earnings. This shift away from mega caps benefited industrials and financials amid rate cut hopes, although trading volume was subdued before Labour Day. In Europe, equities rose sharply, with the Eurozone’s Stoxx 50 gaining 1% on positive US momentum and lower-than-expected inflation in Germany. French luxury shares and ASML also performed well.

Summary for 30.08.2024

Asian markets climbed on Friday, with MSCI's Asia-Pacific index up 0.44% and set for a 2% gain in August. Strong US economic data eased recession fears, boosting sentiment despite earlier volatility. Tech-heavy indices in Taiwan and South Korea rebounded, while Japan's Nikkei gained 0.6% despite weak domestic data. Shares in Australia, Japan, South Korea, Hong Kong, and China also advanced, recovering early-month losses.

European and US equity markets are expected to open slightly higher, supported by optimism over potential rate cuts and easing concerns in the tech sector following Nvidia's earnings.

Oil prices saw modest gains on Friday, with Brent crude rising to $80.08 and West Texas Intermediate to $75.98 a barrel, supported by production disruptions in Libya and planned cuts in Iraq. Despite these factors, prices are set for August losses of 1.7% to 2.5% due to lingering fears of a global demand slowdown, especially from China. US economic resilience and potential rate cuts provided some support.

The revised second-quarter US GDP report showed stronger-than-expected growth, with GDP annualised at 3.0%, up from 2.8%, driven by robust consumer spending. Despite concerns over a cooling labour market, consumer activity remains solid. The Atlanta Fed forecasts third-quarter GDP growth at around 2.0%, aligning with trend levels, with potential for further support as inflation eases and interest rates fall.

In August, Tokyo’s core consumer price index rose 2.4% year-on-year, exceeding forecasts and the central bank’s 2% target, reinforcing expectations for more Bank of Japan rate hikes. A broader inflation measure increased 1.6%. The rise in Tokyo inflation, driven by subsidy phase-outs and higher rice prices, supports a tightening monetary policy outlook. Industrial output also showed a 2.8% rise in July, with mixed future projections.

Germany's annual inflation rate dropped to 1.9% in August 2024, falling below the 2.1% forecast and down from 2.3% in July, marking the lowest level since March 2021. The Consumer Price Index (CPI) edged down 0.1% month-on-month, contrary to expectations of a 0.1% increase. The EU-harmonised CPI also fell to 2% year-on-year, missing the 2.3% consensus.

With 98% of S&P 500 companies reporting, second-quarter earnings growth stands at 11.3%, surpassing expectations. Around 79% of companies beat estimates, particularly in utilities, health care, and financials. Despite lower forecasts for Q3 and Q4, full-year earnings growth is set to exceed 10%, well above last year's 1%, supporting strong equity market gains. Double-digit growth is expected in 2024 and 2025.

A Wall Street Journal poll conducted between 24 and 28 August shows Democratic nominee Kamala Harris leading Republican Donald Trump by 1% (48% to 47%) and by 2% in a ballot including independents and third-party candidates. This is Harris's first lead over Trump in WSJ surveys since April 2023. The race remains tight, with both candidates closely matched as the election approaches.

Ulta Beauty reduced its annual sales and profit forecasts on Thursday due to declining demand for high-priced cosmetics and fragrances. Shares fell 7% after the update. The company's second-quarter comparable sales dropped 1.2%, and net sales rose only 1% to $2.55 billion, missing expectations. Annual net sales are now projected between $11 billion and $11.20 billion, down from $11.5 billion to $11.6 billion.

Marvell Technology reported stronger-than-expected second-quarter results, with revenue of $1.27 billion and adjusted earnings of $0.30 per share, surpassing estimates. The company saw a nearly 92% increase in data centre revenue, driven by strong AI demand, despite weaknesses in other sectors. Shares rose over 7% in after-hours trading. For Q3, Marvell expects EPS between $0.35 and $0.45, with revenue projected at $1.45 billion.

Dell Technologies reported stronger-than-expected Q2 results with $25 billion in revenue and $1.89 per share in earnings, driven by a 38% revenue increase in its Infrastructure Solutions Group due to high demand for AI-optimised servers. Shares rose over 3% post-results. Dell is also exploring the sale of its cybersecurity unit, SecureWorks, valued at $800 million, which saw a 34% share surge following the announcement.

Lululemon Athletica reported Q2 earnings of $3.15 per share, surpassing estimates, with revenue rising 7% year-over-year to $2.4 billion. Despite issuing weaker-than-expected guidance, the equity rebounded, ending more than 4% higher. International sales grew strongly, while growth in the Americas slowed. The company also improved its margins and expanded its store count.

Autodesk Inc. reported stronger-than-expected Q2 results, with adjusted earnings of $2.15 per share and revenue of $1.51 billion, driving shares up 5% after hours. The company raised its fiscal 2025 guidance, forecasting full-year EPS of $8.18 to $8.31 and revenue of $6.08 billion to $6.13 billion. Growth was broad-based, particularly in design and construction segments.

Birkenstock Holding’s shares fell over 16% on Thursday after Q3 earnings and revenue missed expectations. EPS of $0.40 was below the $0.52 forecast, and revenue of $564.8 million fell short of $566.15 million. Despite a lower gross profit margin and in-line adjusted EBITDA, the company reaffirmed its 2024 revenue and profitability guidance. Analysts remain cautiously optimistic about the company’s long-term outlook.

Apple and Nvidia are reportedly considering investing in OpenAI, potentially valuing the ChatGPT maker at over $100 billion. This follows news that Thrive Capital will lead a $1 billion funding round. OpenAI, crucial to Apple's AI strategy and already valued at $80 billion in February, is also backed by Microsoft, its largest investor. Exact investment details remain undisclosed.

Shares in French spirits makers Remy Cointreau and Pernod Ricard surged on Thursday after China decided not to immediately impose anti-dumping measures on EU brandy. The EU's recent tariffs on Chinese electric vehicles may have influenced this decision. While China's commerce ministry found evidence of dumping, it left open the possibility of future tariffs. Investors reacted positively, with Remy and Pernod shares initially rising 12% and 10% respectively.

Nokia’s shares rose 4.5% following reports that Samsung is interested in its mobile networks assets. Nokia, exploring options such as selling or merging the division, has faced competition from rivals like Huawei and declining demand for 5G. Samsung’s interest could strengthen its position in radio access networks. Nokia remains committed to the business while considering new growth areas like fixed networks and AI.

Intel Corporation is exploring major changes to address its historic slump, including potentially separating its foundry business and halting new factory plans. The chipmaker, struggling to compete with rivals like TSMC and NVIDIA, has already suspended its dividend and cut 15% of its workforce. Intel is consulting with Goldman Sachs and Morgan Stanley on these strategic options.

Barclays analysts highlighted that Super Micro Computer faces increased scrutiny following its delay in filing its 10-K annual report, citing internal control issues. The delay could raise concerns about corporate governance, especially given SMCI's past Nasdaq delisting. Despite management's assurances of strong fundamentals and compliance with export controls, analysts warn the delay might negatively impact SMCI’s shares and highlight ongoing challenges with pricing and competition.

Wedbush praised Nvidia's recent earnings as a "masterpiece performance," highlighting a 122% revenue surge to $30 billion and a strong forecast of $32.5 billion for the October quarter. They noted that Nvidia's AI GPUs are in high demand, outstripping supply, and driving the AI revolution. Despite some market declines, Wedbush remains bullish on Nvidia and the broader tech sector, likening the AI boom to the early days of the internet.

Wall Street analysts remain bullish on Taiwan Semiconductor following Nvidia’s latest earnings report. Despite Nvidia’s shares dropping over 6% after its forecast missed expectations, analysts are optimistic due to strong demand for Nvidia’s chips and TSMC’s plans to double its CoWoS capacity by 2025. Citi projects TSMC's AI revenue to exceed 20% in 2024, while Bank of America also maintains a Buy rating on TSMC.

Citi analysts have named Apple their top AI pick for 2025, surpassing Nvidia and Arista Networks. This follows Apple's upcoming iPhone 16 event, where updates are expected to enhance AI capabilities. Citi forecasts iPhone sales of 85 million in 2024 and 92 million in 2025, noting Apple's shares have historically outperformed the market during this period. They view the recent CFO transition positively and anticipate AI features will drive significant upgrades.

William Blair initiated coverage of Tesla with an Outperform rating, highlighting the company's undervalued energy storage segment, including Megapack and Powerwall, as a key growth driver amid tempered EV expectations. The firm views Tesla’s energy solutions, along with its automotive and emerging AI technologies, as central to its future. Despite a high valuation, William Blair justifies it through Tesla's unique technology and market position.

Morgan Stanley has downgraded the energy and automotive sectors in Europe, citing peak crude oil market conditions and weak sector performance. The energy sector was downgraded to underweight due to high valuations and low pricing power, while the automotive sector's ranking fell further to 26th place. Conversely, the firm upgraded real estate and diversified financials to overweight, driven by positive bond yield sensitivity and strong sector momentum.

Wells Fargo analysts suggest bank shares may outperform if there is a soft landing and expected rate cuts, citing past trends where rate cuts without a recession led to a brief decline followed by a 21% rally. However, if rate cuts coincide with a recession, bank equities historically underperform. The upcoming Federal Reserve meeting on 17-18 September could be pivotal.

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