IT sector leads Q2 earnings
In the US, the S&P 500 and Nasdaq indices remained flat until Thursday as investors awaited the release of Friday's job report, which had not been published at the time of writing. Both indices eased slightly from their all-time highs set earlier in August.
The Nasdaq index currently trades at a price-to-earnings (P/E) ratio of 26.4, slightly above its five-year median of 25.7. This may seem somewhat surprising considering the boom in artificial intelligence (AI). This trend appears not to have led to significantly higher valuation multiples for the index as a whole. The S&P 500 is valued at a P/E ratio of 22.2, also above its five-year median of 20.7.
All eyes are now on Friday’s job report. The outcome may trigger the Federal Reserve (Fed) to cut interest rates, which would likely have a positive impact on equity markets. Economists estimate that around 75,000 new jobs were created in August, with the unemployment rate expected to be 4.3%. If job growth remains below 100,000 for four consecutive months, it would mark the weakest streak since the start of the pandemic in 2020. The report’s results will play a key role in the Fed’s decision in September.
With the earnings season ending, we can take stock of the performance. Of the S&P 500 companies that reported earnings, 80% exceeded expectations, 15% fell short, and the remainder were in line with forecasts. Among the sectors, information technology (IT) was the top-performing sector, with 93% of companies beating estimates. The materials sector lagged behind, with only 50% reporting better-than-expected results.
In Europe, the picture was less optimistic. Within the STOXX Europe 600 index, only 52% of companies exceeded expectations, with IT outperforming and materials lagging at the bottom.
Notable company news this week included Sanofi, whose shares dropped by 8% following disappointing trial results for its eczema drug.
Similarly, Infineon experienced a nearly 10% decline in its share price after CFO Sven Schneider highlighted two key challenges: intensifying competition in the Chinese automotive market and the negative impact of a weakening US dollar against the euro. Although these issues had been mentioned during the company’s post-earnings call, the market interpreted the remarks as a signal that future guidance might be weaker than anticipated.
Alphabet's shares rose by 8% after a favourable antitrust ruling. The company avoided a potential requirement to sell its Chrome browser. Instead, it will only need to share certain data with competitors.
Constellation Brands, the company behind Modelo Especial and Corona, lowered its full-year sales and earnings forecasts due to reduced spending by Hispanic consumers on premium beer. The company now expects organic net sales to decline by 4% to 6%, a drop from its earlier projection of up to 1% growth. This announcement led to a share price drop of as much as 7.8%, as multiple brokers reduced their price targets. CEO Bill Newlands attributed the decline to economic challenges and immigration concerns. These factors have significantly impacted Hispanic consumers, who make up more than half of Modelo's customer base.