EU Reports Weaker Manufacturing Data The Day After The ECB Hikes Rates

(Friday Market Open) Investors seem to have a day to focus on earnings because there’s little economic news to digest, but social media stocks are certainly giving them something to chew on.

Potential Market Movers

Twitter TWTR reported a loss of eight cents per share, well below the expected 14 cent per share profit. It also fell short on revenues, citing currency headwinds and uncertainty around its acquisition by Elon Musk. Snap SNAP, the parent company of Snapchat, plunged more than 30% in the premarket after missing on earnings due to year-over-year sales nosediving from a 38% increase a year ago to just 13% this quarter.

The news from Twitter and Snap pulled other companies that rely heavily on digital ads lower as Alphabet (NASDAQ: GOOGL), Meta (NASDAQ: META), and Pinterest PINS respectively fell 2.31%, 4.45%, and 7.4% before the opening bell.

Moving over to the communications sector, Verizon VZ reported a miss on earnings despite higher than expected revenues. VZ also cut its fiscal year forecast, which led to the stock falling 5% in premarket action.

Seagate Technology STX fell 12% in the premarket as investors reacted to the company missing on top and bottom line numbers. The computer hardware company pointed to weaker sales and a weaker economic environment as causes for the misses.

Moving over to financials, American Express AXP offered some positive news as it reported a beat on earnings and revenues due to record cardmember spending. AXP was up 3.77% in premarket action.

American Express also offered insights into where consumers are spending their money. They saw spending growth in travel and leisure as well as high-end products.  

Another stock that is rising is Schlumberger SLB; it also beat on earnings, prompting the stock to trade 3.75% higher in the premarket. The oil field services giant also increased its forward earnings guidance.

One economic report of note came out of the European Union: a lower-than-expected manufacturing PMI number. The index tracks manufacturing orders, and it fell below 50, which suggests a contraction in manufacturing. The news appears to have pushed the euro lower against the dollar, but it has trimmed some of its losses ahead of the opening bell. European investors appeared to shrug off the news as the Stoxx Europe 600 index was 0.56% higher overnight.

A weakening global economy has been blamed on weaker commodity performance. WTI crude oil futures were down 0.87% before the opening bell and is testing support once again. However, natural gas futures continued their climb, rising more than 2% and regaining nearly all of yesterday’s losses..

Reviewing the Market Minutes

The Nasdaq ($COMP) led the other major indexes higher yesterday by rising 1.36%. It was followed by the S&P 500® index (SPX) at 0.99% and the Dow Jones Industrials ($DJI) at 0.51%. It wasn’t a particularly broad rally; advancers barely outpaced decliners. But investors did seem to favor growth stocks over value when you compare the S&P 500 Pure Growth Index climbing 0.97% to the S&P 500 Pure Value Index falling 0.35%.

Mega-cap stocks were helped by weakness in the dollar. The CRSP U.S. Mega-Cap Index rose 1.05% as the U.S. Dollar Index ($DXY) fell 0.44%. Because most mega-cap stocks earn revenues around the globe, the strong dollar makes those earnings worth less when converted back to greenbacks. Currency headwinds are a common theme in the Q2 earnings season.

The dollar fell as the European Central Bank (ECB) raised its key rate by 50 basis points, making it the first hike for the ECB in 11 years. Additionally, the ECB expects to continue “normalizing” rates while it tries to battle inflation problems on its own continent, which suggests more hikes in the future. If the ECB continues to raise rates and the Federal Reserve starts to slow its hikes, the dollar will likely weaken as well, which could spell more good news for multinational mega caps.

The Bank of Japan (BoJ) announced that it will keep its key rate where it’s at, but the BoJ lowered its 2022 gross domestic product (GDP) growth forecast to 2.4%. The Nikkei was up 0.44% yesterday, and Nikkei 225 Futures were up 1.11% ahead of the open in Tokyo.

The United States had a few poor economic reports this morning. The Philadelphia Fed Manufacturing Index was much lower than expected with a -12.3 print compared to the forecast of -2.5, and unemployment claims came in higher than expected for the seventh week in a row. Microsoft MSFT added to the negative employment news, saying it is going to slow its pace of hiring. However, investors appeared to shrug off the reports as perhaps the news was already priced into the markets.

The energy sector was the only one of the S&P 500’s 11 sectors to finish the day in the red. The Energy Select Sector Index tumbled 1.70% as WTI crude futures settled 3.4% lower to $96.49 per barrel, natural gas futures fell 1.2%, and unleaded gasoline futures decreased 3.7%.

CHART OF THE DAY: GROWTH CHART: The S&P 500 Pure Growth Index ($SP500PG—candlesticks) has underperformed the S&P 500 Pure Value Index ($SP500PG—pink) over the last 12 months. However, the growth index is gaining on the value index in relative strength (green), which suggests there may be a shift in investor sentiment. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch 

GROWING UP: If investors are starting to shift from value investments to growth investments, it could be a good sign for interest rates and the markets. Value investing tends to outperform growth investing when interest rates are rising. If investors are moving to growth strategies, then it could signal that rate hikes are coming to an end.

It’s important to remember that many of the interest rates that directly affect business tend to correlate with or are tied to the 10-year Treasury yield (TNX). The 10-year yield isn’t one that the Fed directly influences outside of bond buying in the open market, which the Fed is no longer doing at this time. Because these yields are set by the market, they may already be accounting for the Fed’s further hikes during the remainder of the year, which means they may not move much more—unless something big happens.  

If yields do even out, the U.S. dollar could stabilize, which would likely be good news for multinational companies hurt by currency headwinds.

NEGATIVE GROWTH: Another bullish signal that comes from strength in growth stocks is that investors are feeling the economy is getting stronger and that economic growth could be coming soon. So far, 2022 has been a tough one for the economy as Q1 saw negative GDP growth of 1.3% and the Atlanta Fed GDPNow tool is projecting Q2 GDP at -1.6%. Historically, two consecutive down quarters has been considered a recession, which makes next week’s GDP report even more interesting.

However, because GDP is a backward-looking measurement, the stock market tends to be forward looking because investors are trying to anticipate future earnings. If earnings are expected to rise, the economy usually follows.  

STUNTED GROWTH: While a little life in growth stocks is a positive sign, the yield curve, as measured by the 2s10s yields spread ratio, is still negative. And it has been a reliable indicator of future recessions. This means that the U.S. economy could see a little growth just before going into another recession.

With that said, the 2s10s ratio has not been a very good timing tool. A recession has occurred as quickly as six months from an inversion to as long as two years. This leaves plenty of time for another bull market, although it may be a little stunted.

Notable Calendar Items

July 25: Earnings from NXP Semiconductors NXPI, and Whirlpool WHR

July 26: New home sales and earnings from Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOGL), Visa V, Coca-Cola KO, McDonald’s MCD, United Parcel Services UPS, and 3M MMM

July 27: Durable goods orders, Pending home sales, and earnings from Meta (NASDAQ: META), Qualcomm QCOM, Rio Tinto RIO, Boeing BA, and Automatic Data Processing ADP

July 28: Gross domestic product (GDP) and earnings from Apple AAPL, Amazon AMZN, Mastercard MA, Intel INTC, and Caterpillar CAT

July 29: PCE Price Index and earnings from Exxon Mobil XOM, Procter & Gamble PG, Chevron CVX 

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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