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The ASX200 recovered strongly from an aggressive early morning sell-off on Tuesday to close down 0.5%, not a great result but far better than the earlier 1.2% drop. The index actually managed to end the session close to its intraday high as bargain hunters surfaced in most areas except for the resources—again! Following the placement of 100 million Fortescue (FMG) shares at $18.55, the iron ore miner fell over 10%, contributing almost a third of the ASX’s decline. When combined with BHP’s 53c drop, we had two major miners making up over 50% of the main board’s 36-point drop.
The market was lower today, though it recovered nearly 60 points from the lows so showed some backbone into weakness, with consumer discretionary stocks following their US peers higher, while Financials remained well supported.
US equities had a cautious overnight session ahead of this week’s major tech reports. Microsoft, Meta Platforms, Apple, and Amazon are likely to determine whether tech stocks can bounce back from last week’s declines. So far, with just over 40% of S&P 500 having now reported, according to FactSet, Q2 blended earnings growth is running at +9.8%, up ~100 bp from end of June. Blended revenue growth rate is +5.0%. In addition, 78% have beaten consensus EPS expectations, in line with one-year average, while 60% have beaten on revenue, below the 63% average. Earnings beats are being rewarded less than average and misses being punished more than average, a theme we have flagged.
The ASX 200 is back testing the 8000 level with broad-based gains to kick off an important week. Local inflation data out on Wednesday the headline act, while Q2 earnings in the US increase and local reporting season slowly builds steam.
The last few weeks saw the S&P500 correct 4.9% and the tech-based NASDAQ 9.5%, including their worst day in almost a year on Wednesday following disappointing earnings from Tesla (TSLA US) while Alphabet (GOOGL US) broadly met expectations, yet shares still fell. The simple problem is expectations are high, plus of course we’ve gotten used to ‘beats’ rather than ‘meets’ from US tech, and if companies don’t deliver, hot/momentum money exits, often resulting in a dramatic unwind, which is amplified by passive ETF flows. The recent concerns around the AI and tech space will come further under the microscope this week when Amazon, Meta, Apple, and Microsoft report June quarter earnings.
The week started with the news that Joe Biden had finally stepped aside for Kamala Harris to run against Trump; the odds of a Republican victory have shortened, but the Don remains the clear favourite. However, 100 days is a massive time in politics; everyone is now talking about Kamala Harris having a chance of victory just two weeks after Trump was shot in Pennsylvania. On Wednesday night, US tech stocks unravelled as earnings missed lofty expectations, e.g. Tesla shares (TSLA US) plunged over 12% on weaker-than-expected results, including a 7% drop in auto revenue year-on-year and Alphabet (GOOG US) suffered its worst day since January, falling 5% after YouTube advertising revenue fell below expectations. The NASDAQ finished the week down 2.6%, while the Russell 2000 small caps gained 3.5%!
A solid session to end a tough week for stocks, though as we near the end of the July the ASX remains higher for the month, up nearly 2%, with a bullish start tapering off as large cap technology stocks experience recent momentum unwinding as the expectations around interest rates permeate through markets. US rates are about to come down, which has underpinned a reversal of recent themes with more economically exposed sectors and smaller companies starting to outperform the narrow cohort of technology stocks that have underpinned the markets performance over the past year. Trends are clearly changing, which creates some short term instability, however ultimately, this is positive for the broader health of the market, the ASX today breaking back up through 7900 as we work on creating a new trading range into August.
We are making several changes to the Emerging Companies Portfolio today, repositioning towards stocks we believe offer a better mix of quality and leverage to the themes we remain confident in.
MM has been adopting a more defensive stance over recent weeks, but it’s never enough when the index registers a triple-digit decline. However, as the ASX200 threatens to break cleanly below 7900, the psychological 8000 area is rapidly becoming a distant memory, although while it doesn’t feel like it, the ASX200 is still up +1.2% in July. While we are not index punters at MM, it is important to recognise the risks as/when they arise; as stocks enter the seasonally weak August and September, a pullback towards 7500 should not be discounted, i.e. another 4-5% lower. Hence, at this stage, we remain open minded about what comes next, in no hurry to migrate back up the “risk curve”, although we’re not as far down it as we’d like to be with our tilt towards commodities.
A tough day at the office with the ASX getting hit hard right across the board, with corporate updates mostly on the softer side. All 11 sectors finished lower with 82% of the main board in the red implying there were very few places to hide, with the market closing smack on its lows.
