Key highlights from Q2 earnings season around the globe

Executive summary:

We believe the Fed rate-cutting cycle could last a year
The U.S., Europe, and Japan all reported strong second-quarter earnings results
Economic growth is slowing in China

On the latest edition of Market Week in Review, Director and Senior Investment Strategist Alex Cousley and ESG and Active Ownership Analyst Zoe Warganz discussed key takeaways from the U.S. Federal Reserve’s (Fed) annual economic symposium in Jackson Hole, Wyoming. They also reviewed highlights from second-quarter earnings season in the U.S., Europe, and Japan, and finished with an update on the potential for additional stimulus in China.

September Fed rate cut likely to be the first of many

Warganz and Cousley began with a recap of the 22-24 Aug Jackson Hole summit, which featured a keynote speech on the state of U.S. monetary policy by Fed Chair Jerome Powell. Cousley said that Powell made it clear that the U.S. central bank would cut rates soon, with the Fed leader remarking that “the time has come for policy to adjust.”

“Chair Powell basically signaled to the market that a September rate cut is a lock–an expectation we’ve had at Russell Investments for some time,” Cousley stated. Powell also flagged the recent cooling in the U.S. labour market in his speech, stressing that the Fed doesn’t want to see any further deterioration moving forward, he noted. These remarks show that the central bank isn’t looking at a September rate cut as a one-and-done deal, but rather the first in what’s likely to be a series of rate cuts extending through much of next year, Cousley said.

“Fed leaders are clearly thinking about lowering rates back down to a neutral level–that is, to a level that neither stimulates nor slows the economy. Our estimate is that the neutral rate is around 3.0% to 3.25%,” he stated, noting that the central bank’s current rate is at a 23-year high of 5.25%-5.5%. Cousley said he anticipates that a rate cut at every Fed meeting from September 2024 through sometime in the third or fourth quarter of 2025 will be necessary in order to accomplish this.

So, what are some of the implications of lower rates on investor portfolios? Cousley said one impact is that the attractiveness of the 5-year U.S. government bond has dissipated a bit due to expectations for Fed easing. However, he said U.S. Treasuries still make for a decent tactical opportunity given that recession risks remain.

Nvidia stock falls despite strong Q2 earnings. Why?

The conversation pivoted to second-quarter earnings season, which is wrapping up across the globe. Cousley said that in the U.S., the season has generally gone well, with earnings beat rates among S&P 500 companies a bit higher than usual.

Markets were laser-focused on AI (artificial intelligence) chipmaker Nvidia’s earnings results, which topped analysts’ expectations when they were released on 28 Aug, he noted. Interestingly enough, however, the company saw its stock price slide by roughly 6.5% shortly after, Cousley said. Why?

“One likely reason is because Nvidia didn’t beat earnings expectations by as much as many analysts expected. Another reason is that the company’s third-quarter guidance was within the range of analyst expectations–but not at the upper end,” he explained. Lastly, Nvidia is also experiencing some production problems in the rollout of its much-anticipated new Blackwell chip, which it hopes to begin delivering to customers during the fourth quarter, Cousley remarked.

Beyond the U.S., he said that second-quarter earnings beat rates have also been better than usual in both Europe and Japan. Japan has done particularly well in topping sales estimates as well, Cousley added, leading to an increase in earnings revisions.

Japan’s strong earnings season shows that the country’s economy is on solid footing, he noted, which is especially important in the wake of the massive selloff in Japanese stocks on 5 Aug. “After the Bank of Japan raised interest rates for a second time in early August and the Japanese yen carry trade started to crumble, volatility surged through nation’s equity market, but the strong performance of Japanese companies in Q2 shows that the economy is in a healthy state,” he remarked.

Will China announce more stimulus measures?

Warganz and Cousley wrapped up by unpacking the latest economic developments from China, which continues to grapple with weak consumer demand and a tepid property market. Cousley said some of the policy measures that the Chinese government announced in response to slowing economic growth seemed exciting at first, but have since suffered from lack of a real follow-through. “This is a concern, and it’s causing economists to downgrade their expectations for GDP (gross domestic product) growth in China for both this year and next,” he stated.

Cousley added that he thinks the government will deliver incremental stimulus in some form or another in the months ahead, but stressed that it’s likely to be a slow process. Chinese leaders might also need to see additional signs of economic weakening before taking further action, he said, noting that the People’s Bank of China could also potentially cut rates to boost growth.

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Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.