Key themes from the early days of U.S. Q2 earnings season

On the latest edition of Market Week in Review, Investment Strategist Alex Cousley and ESG and Active Ownership Analyst Zoe Warganz discussed the early results from U.S. second quarter earnings season. They also chatted about the latest GDP number from China and the softer-than-expected inflation data from the UK.

What's the early read on Q2 earnings season in the U.S.?

Warganz and Cousley kicked off the segment by discussing U.S. second quarter earnings season, which Cousley said is still in its early days, with approximately 18% of S&P 500 companies having reported results as of market close on 20 July.

The main themes from the season so far are that banks are generally beating expectations, and that there's been a bit of softness in the tech sector, he stated. In particular, Netflix slightly missed expectations on revenue, while slowing revenue growth at Tesla and the potential for more price cuts disappointed investors, Cousley said. "As a result, both names sold off recently, with Netflix dropping around 8%, while Tesla sank nearly 10% on 20 July," he remarked.

Cousley added that chipmaker Taiwan Semiconductor recently reported both a steep drop in revenue and a disappointing revenue forecast moving forward. "Overall, the week of 17 July saw a little disappointment in tech, but I think we'll get a much better sense of how the sector is doing in a few more days, when Microsoft, Google, Amazon and Meta all report," he concluded.

Q2 economic growth in China falls short of expectations

Shifting to China, Cousley said the latest batch of economic data from the world's second largest economy came in softer than expected. In particular, second quarter GDP (gross domestic product) growth fell short of expectations, he noted. "Consensus expectations were for 7.3% year-over-year growth, compared to an actual reading of 6.3%," Cousley remarked.

He explained that China is still facing the same challenges from a year ago namely, soft consumer confidence, a struggling property market and a lack of large-scale stimulus measures. Recently, a few stimulus announcements aimed at bolstering the Chinese consumer have been unveiled, but they've been very small in size and generally reflective of a piecemeal approach, Cousley said. 

"All eyes will be tuned into the upcoming Politburo meeting for signs of any more stimulus measures, as what we've seen so far from China probably isn't enough to boost consumer spending," he stated. Cousley added that he believes the Russell Investments strategist team's forecast of 5% GDP growth this year is still reasonable, noting that many other analysts that came into 2023 with higher growth expectations have since downgraded to this level.

UK core inflation slows

Warganz and Cousley concluded their conversation with a look at the latest inflation data from the UK, which Cousley said came in softer than anticipated. In particular, the rate of core inflation slowed to 6.9% year-over-year in June, he said, noting this was 0.2% lower than analyst expectations.

"The June report was particularly encouraging, as UK core inflation had gone back up in the past few months, after initially falling earlier in the year. The cooldown was a pretty big surprise to the downside, and bond markets reacted strongly," Cousley said. Case-in-point: 2-year UK government bond yields were still down by 17 basis points (bps) the day after the June inflation report, he remarked, noting that at one point, they had plunged by as much as 35 bps.

However, Cousley cautioned against reading too favourably into the inflation report, noting that even though the June numbers were lower than anticipated, an inflation rate of 6.9% is still very high and far above the Bank of England (BoE)'s target rate of 2%.

"I don't think this latest number will stop the BoE from delivering a couple more rate hikes. However, traders had priced in several more rate increases before the June report came out. That number has since dropped, as markets now think the BoE might not have to take its policy rate all the way to 6% or 6.5% to tame inflation," Cousley concluded.

Watch the videoListen to the podcast

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