Stock Markets Mixed as Earnings Season Begins

The major stock market indexes saw mixed outcomes following the start of earnings season with banks. The S&P 500 was up 0.69% for the week (+18.15% year-to-date), hovering near its best level in 16 months. The Nasdaq Composite slid 0.57% (+34.07% year-to-date) weighed down by heavyweight companies. Tesla stocks (TSLA) plunged 7.59% week-over-week (up 111.09% YTD) as the EV manufacturer’s profitability shrank in the second quarter. CEO Elon Musk indicated he might reduce prices once more in chaotic periods, as his pricing battle with automotive competitors impacts his firm's own margins. Meta Platforms (META) and Alphabet-Google (GOOG) were also losing momentum, down 4.73% and 4.29% respectively (up 144.52% and 35.59% YTD).

Since late May, when the excitement surrounding Nvidia began to escalate, these giants have propelled the tech-heavy Nasdaq Composite upwards, while the Dow Jones Industrial Average has faltered. This pattern may be changing as the Dow increased by 718 points, or +2.08% for the week (+6.28% YTD), powered by Johnson & Johnson (JNJ), which surged 6.46% following the company's better-than-expected Q2 results and enhanced yearly outlook. Goldman Sachs (GS), another member of the Dow, rose by 7.90%, despite the firm reporting an earnings shortfall following a devaluation in its commercial real estate portfolio. But CEO David Solomon highlighted signs of a recovery in investment banking.

In Europe, the MSCI EMU advanced 0.36% (+13.64% YTD) while the FTSE jumped 3.08%, bringing its YTD performance into positive territory (+2.84%). The spotlight this week was on the UK inflation data released on Wednesday. After persisting longer than many had forecasted in the preceding months, it dropped from an annual rate of 8.7% in May to 7.9% in June, below City forecasts (8.2%). Expectations for UK interest rates have decreased accordingly.

In Asia, the Shanghai composite index lost 2.16% over the week (+2.54% YTD). Economic growth in China slowed substantially through the second quarter (0.8% vs 2.2% in Q1). The Nikkei edged down 0.27% (+23.80% YTD) ahead of the Bank of Japan’s policy meeting next week.

Defensive sectors on the rise

Defensive sectors found their footing, as evidenced by the strong rebound of health care (+3.46% for the week, +0.14% YTD), utilities (+2.40% for the week, -2.98% YTD), and consumer staples (1.64% for the week, +1.69% YTD). But the performance gap between those sectors and growth stocks is still substantial, even if the latter showed some weakness this week.

The communication services and consumer discretionary sectors indeed pushed the broader market lower, offsetting most of their last week’s gains, with losses of 3.01% and 2.28% respectively. That said, they remain among the best performers in 2023, up 35.48% and 33.15% respectively, just behind information technology (+43.79% YTD). Tech stocks treaded water this week (-0.08%). Apple edged up 0.66% (+47.73% YTD) while Microsoft edged down 0.43% (+43.35% YTD).

Financials fared well (up 2.96% for the week, +2.91% YTD) with JPMorgan Chase (JPM, up 3.46%) and Wells Fargo (WFC, up 5.51%) reporting quarterly results that beat on the top and bottom lines. Ditto with regional lenders. Citizens Financial Group (CFG) and M&T Bank Corporation (MTB) jumped 11.77% and 5.41% respectively, both beating expectations as they got a boost from rising interest rates.

Lastly, it’s worth noting that the energy sector gained momentum, up 3.53% over the week. The WTI crude oil price rose by 2.19%, slightly over $77/bbl, prolonging its winning run to four weeks. Yet, the Energy Information Administration stated on Wednesday that U.S. crude reserves dropped by 708,000 barrels last week, vastly below the predicted 2.4M barrel decline. This implies that fuel demand is faltering in the globe's largest consumer, even amid the travel-intensive summer season, as it comes after an unexpectedly large boost in inventories the previous week. Simultaneously, the Energy Information Administration reiterated its belief that oil markets are set to tighten during the second half of the year.

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