Wall Street dips as investors await big tech earnings reports

Wall Street experienced a modest decline on Tuesday, July 23, 2024, as investors eagerly awaited earnings reports from tech behemoths Alphabet and Tesla. The stock market's performance underscored the pivotal role that Big Tech financial results play in shaping investor sentiment and market trends.

The three major U.S. stock indexes closed in negative territory, with the S&P 500 slipping 0.16% to 5,555.74 points, the Nasdaq Composite losing 0.06% to 17,997.35, and the Dow Jones Industrial Average falling 0.14% to 40,358.09. This slight downturn came despite initial gains driven by optimism surrounding the tech sector.

Megacap Stocks and Market Dynamics

While most megacap stocks, including Apple, Microsoft, Meta Platforms, and Amazon.com, posted gains between 0.3% and 2.1%, their positive performance wasn't enough to buoy the overall market. This scenario raises questions about the sustainability of the 2024 stock rally and whether a rotation away from megacap stocks towards underperforming sectors might be on the horizon.

Earnings Season in Focus

The earnings season has taken center stage, with investors closely monitoring financial reports to gauge the health of corporate America. Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers, emphasized the importance of earnings, stating, "We're paying attention to earnings, as that's what matters this week and next, and the price reaction to those earnings will be very telling".

Big Tech Earnings Spotlight

Alphabet and Tesla Lead the Pack

After the market close, Alphabet and Tesla kicked off the earnings reports for the "Magnificent Seven" stocks. Both companies surprised investors with positive revenue numbers for the second quarter.

• Tesla reported an unexpected rise in revenue, delivering more vehicles than analysts had anticipated, aided by price cuts and incentives.
• Alphabet surpassed revenue estimates, driven by strong digital advertising sales and robust demand for its cloud computing services.

These results are crucial in determining whether the tech-driven market rally can maintain its momentum or if a broader market rotation is imminent.

Sector Performance and Notable Movers

Energy Sector Struggles

The energy index emerged as the worst-performing S&P sector, declining 1.6% as U.S. crude prices hit a six-week low. This downturn highlights the ongoing volatility in commodity markets and its impact on related stocks.

Mixed Results from Household Names

Several well-known companies reported earnings with varying outcomes:

• United Parcel Service (UPS) saw its stock plummet 12.1% to a four-year low after missing earnings estimates due to subdued package delivery demand and higher labor costs.
• General Motors dropped 6.4% despite beating second-quarter expectations and raising its annual profit forecast.
• Spotify jumped 12% after posting a record quarterly profit slightly ahead of expectations.
• Coca-Cola rose 0.3% following an increase in its annual sales and profit forecasts.

Market Sentiment and Future Outlook

Investors are closely watching the earnings season for clues about the overall health of the economy and corporate profitability. With 81.1% of the first 74 S&P 500 companies reporting better-than-expected results, the earnings season has started on a positive note.

However, Janasiewicz cautioned that companies missing earnings expectations might face harsher consequences in the current market environment. He noted, "If you miss based on where we are right now, maybe there's going to be more punishment doled out".

Trading Volume and Market Breadth

The trading volume on U.S. exchanges reached 10.45 billion shares, slightly below the 20-day average of 11.33 billion. This moderate volume suggests a cautious approach from investors as they digest earnings reports and assess the market's direction.

In terms of market breadth, eight of the major S&P sectors ended in negative territory, indicating a broad-based decline despite the resilience of some tech stocks.

As Wall Street navigates through the earnings season, the performance of Big Tech companies remains a critical factor in determining market sentiment and overall direction. Investors will continue to scrutinize financial reports, economic indicators, and sector rotations to gauge the sustainability of the current market rally and identify potential investment opportunities.