Since July this year, weak economic data from the United States has further exacerbated market fears of a recession and led to greater volatility.However, as the market gradually stabilized, investors' expectations of a rate cut by the Federal Reserve in September became clearer and the market has fully priced in the possibility of a rate cut.
From a macro perspective, economic data have been erratic, related to the different stages of the current economic cycle and the "green-tinged" policy environment.Currently, corporate earnings data provides a more micro perspective to help further understand market sentiment.
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Overall trend: Q2 earnings performance exceeded expectations, revenue growth and cost control to drive up net profit margins
At the overall level, U.S. corporate earnings in the second quarter did not show a significant slowdown, but rather accelerated.The S&P 500's second-quarter earnings per share (EPS) rose 11% year-over-year, a marked acceleration from 6% in the first quarter.This suggests that despite increased market concerns about the economic slowdown, the actual situation is not as bad as expected.In contrast, EPS growth for the Nasdaq slowed sharply to 13% from 28% in the first quarter, a deceleration that, while not unduly worrisome, sparked volatility in the market as the growth of highly valued technology stocks slowed.
On the revenue and cost side, year-over-year revenue growth for S&P 500 non-financial companies rose to 5.8% from 4.4% in the first quarter.Main operating costs remained largely unchanged, while costs were not significantly affected by higher oil prices in the second quarter due to the 1-2 month lag effect of higher oil prices.In addition, the year-on-year growth rate of selling and administrative expenses decreased to 5.2% from 5.7% in the first quarter, reflecting the success of the company's cost control strategy.Net profit margin rose to 11.6% from 11.2% in the first quarter, demonstrating the company's flexibility in coping with the downturn in the external economic environment.
Meanwhile, companies' return on equity (ROE) continued to move higher, rising to 24.3% from 23.3% in the first quarter.This was driven by higher net profit margins and asset turnover among non-financial companies.
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Second, technology and cyclical sectors: technology growth slowed but remains a core pillar, the cyclical sector began to rebound
The internal structure of the U.S. stock market shows a clear sectoral differentiation, with the technology sector slowing down, while the cyclical sector is showing signs of repair.Specifically, earnings growth in the semiconductor and equipment sector slowed to 57%, weakening from 88% in the first quarter.
Earnings growth in the Software & Services sector also declined significantly to just 9% (versus 18% in the first quarter), while the Media & Entertainment sector turned negative from 38% growth, indicating pressure on the sector.However, the Technology Hardware sector picked up its performance, with growth recovering to 3.1% from -2.3% in the first quarter.
Meanwhile, cyclical sectors such as energy $Energy Select Sector SPDR Fund(XLE)$ and financials $Financial Select Sector SPDR Fund(XLF)$ began to show signs of recovery.The year-on-year earnings growth rate of the energy sector turned positive at 7.7%, while the earnings growth rate of the financial sector rose from 10% to 18%.These data suggest that the cyclical sector is gradually benefiting from the economic rebound as the downward pressure on the economy is gradually released.
Despite the slowdown in the growth of the technology sector, it remains a major supportive force for the U.S. equity market, especially in terms of capital expenditures and buybacks.Tech giants (e.g., $Apple(AAPL)$ , $Amazon.com(AMZN)$ $Meta Platforms, Inc.(META)$ $Microsoft(MSFT)$ , etc.) continue to increase their capital expenditures significantly, contributing 24% of overall non-financial capital expenditures.At the same time, technology companies are also the main force of stock buybacks, the second quarter of technology stocks doubled the size of the buyback year-on-year, showing the strong willingness of the giant companies in terms of shareholder returns.
Third, the consumer sector: low-end consumption pressure, high-end consumer demand is stable
Consumer sector in the second quarter showed significant differentiation.Due to the downward pressure on the economy, the purchasing power of low-income consumers declined, leading to a slowdown in low-end consumption.
Consumers paid more attention to value for money when purchasing goods, and retailers generally attracted consumers through price reduction strategies. $Wal-Mart(WMT)$ , $Costco(COST)$ and other retail giants in the second quarter through the introduction of low-priced goods or private label, successfully maintained earnings growth.
Mid-to-high-end consumer goods such as apparel and cosmetics have come under pressure, with brands such as $Nike(NKE)$ experiencing slower sales growth in the U.S. market.
Demand for eating out also fell, with earnings contracting at both $McDonald's(MCD)$ and $Starbucks(SBUX)$ , especially as the decline in lower-income consumers led these companies to offer promotional packages to attract spending.
On the other hand, the preference of high-income groups has shifted to experiential spending, such as the travel and leisure services sector, which continues to perform well. Companies such as $Marriott(MAR)$ and $Hilton(HLT)$ reported that travel spending by high-income consumers remained healthy despite the overall slowdown in economic growth, which provided a sustained profitability driver for related companies.
Fourth, the outlook: interest rate cuts are expected to strengthen, profitability sector or benefit
Looking ahead, U.S. stocks may still face volatility in the short term as the market heats up in anticipation of a Fed rate cut.However, in the long run, the rate cut will gradually drive the recovery of cyclical sectors, especially real estate and investment-related industries.
Consumer sectors may continue to be under pressure, but the growth potential of tech and AI-related industries remains huge, with tech giants' investment in AI likely to provide support for many quarters to come.
Against this backdrop, investors should focus more on long term opportunities in the face of market volatility, especially those assets that may benefit from interest rate cuts.
Meanwhile, the performance of the technology and consumer sectors remains a key concern, with the former expected to sustain growth through technological innovation and capital expenditure, and the latter needing to be closely watched for the further impact of the recession on consumer demand.
Overall, the earnings performance in the second quarter was less than expected, but the overall trend is still relatively optimistic, especially in the technology sector's continued contribution to future growth, the U.S. stock market has a certain degree of resilience.
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