The major U.S. indexes ended mixed this week, while small-cap and value stocks benefited from a large-scale rotation out of large-cap growth ones. The Dow Jones Industrial Average (+0.72%) outperformed this week, with value stocks surpassing growth stocks by 4.77 percentage points, the largest divergence since March 2023. The S&P 500 ended the week down -1.97% while the tech-heavy Nasdaq fell -3.65%. Growth stocks lagged due to a sharp drop in chip stocks after the Biden administration hinted at severe export curbs on companies like Tokyo Electron and ASML Holding. Major chipmakers such as Taiwan Semiconductor, Broadcom, and NVIDIA also declined sharply.
With approximately 14% of S&P 500 Index constituents having reported earnings for Q2 2024, blended earnings per share—which combines actual reported data with estimates for unreported companies—indicates a 9.7% increase compared to last year, as per FactSet data. This growth rate surpasses the 6% pace from Q1. Sales growth has risen by 4.6% year over year.
On the political front, Former President Obama and key Democratic leaders are pressing President Biden to reconsider his re-election bid due to concerns about his chances and the impact on Democratic control of Congress. Reports suggest Biden’s family is discussing his exit, though the White House denies it. Betting markets now predict a 57% chance for Vice President Kamala Harris to become the Democratic nominee, while President Biden’s odds have fallen to 28%.
June’s U.S. retail sales exceeded expectations. Although headline retail sales were flat, they showed a sharp increase when excluding the volatile categories of food, gasoline, autos, and building materials. This measure, known as the control group, rose 0.9% from May, leading economists to revise their Q2 GDP forecasts upward.
The European Central Bank (ECB) left interest rates unchanged this week, following last month’s landmark cut. President Christine Lagarde indicated that the ECB’s next interest-rate meeting in September is “wide open,” suggesting that another cut is possible as more inflation data will be available by then. The market is pricing in an 85% chance of a cut at that meeting. The Euro Stoxx 50 dropped -4.28% over the week, amid rising trade tensions between the U.S. and China.
UK headline annual inflation remained at 2% in June, thanks to a significant drop in energy costs. Core inflation held steady at 3.5%, while services inflation stayed at 5.7%. The FTSE 100 fell -1.18% over the week.
The economic strain from China’s troubled property sector impacted the country’s Q2 GDP, which grew by just 4.7% y/y, down from 5.2% in Q1. June retail sales were weak, increasing by only 2% compared to the previous year, a slowdown from May’s 3.7% growth. Chinese equities shrugged off the weaker-than-expected economic growth, with the Shanghai Composite Index rising +0.37% w/w. In Hong Kong, the benchmark Hang Seng Index retreated -4.72%.
Japan’s stock market declined over the week, with the Nikkei 225 Index dropping -2.74%. Technology stocks were hit hard due to growing concerns about stricter U.S. restrictions on exporters of advanced semiconductor technology to China, affecting several Japanese chip makers.
In commodities, Gold fell -0.43% over the week, while Brent oil dropped -2.77% to 82.60 dollars per barrel. In the crypto market, Bitcoin surged +14.90% w/w.
Market Moves of the Week
The SARB’s Monetary Policy Committee kept its repo rate unchanged at 8.25% this week, aligning with market expectations. With 2 out of 6 members voting for a 25bps cut, it would indicate that the holding pattern is nearing its end. The forecast revisions were dovish, with a lower inflation outlook for 2024-25. The SARB now expects inflation to return to the 4.5% target mid-point by Q4 2024, earlier than the previously forecasted Q2 2025.
In his Opening of Parliament address, President Cyril Ramaphosa committed to rapid economic growth by removing obstacles, increasing infrastructure investments, and fixing municipalities. The government will focus on local growth, attracting investment, and boosting labour-intensive sectors like services and agriculture. Efforts will also include processing minerals domestically to create jobs. A future Cabinet strategy session will detail economic interventions for the next five years.
The IMF projects South Africa’s economy to grow by 0.9% this year and 1.2% next year. After lowering its forecasts due to load-shedding and logistics issues in January, the IMF has not updated its predictions since April. The IMF has not commented on the general election results, but officials in June reiterated the need for structural reforms to address economic challenges and emphasized reducing public debt through fiscal consolidation.
South African Finance Minister Enoch Godongwana announced that the Treasury is actively working towards removing the country from a global dirty money watchlist (The Grey List), anticipating an exit in the “first period of 2025.”
The All-Share Index fell -2.16% over the week, led by Industrials (-3.05%). The local currency weakened against the U.S. dollar, as risk-off sentiment took hold, rising to R18.27/$ from last week’s R17.94/$ level. SA government bonds held steady, as yields on the 10-year dipped -0.02% over the week.
Chart of the week
The S&P 500 is set to report 9.3% earnings growth for Q2, the highest since Q1 2022, according to FactSet. Over the past decade, S&P 500 companies have exceeded estimated earnings by 6.8% on average, with 74% reporting actual EPS above estimates. This has boosted the earnings growth rate by 5.5 percentage points from the end of the quarter through the end of the earnings season. Source: Bloomberg
