On August 1st, both the S&P 500 and Nasdaq suffered declines triggered by mixed earnings results from significant pharmaceutical companies and an unanticipated manufacturing slowdown in July.
Mix of Outcomes in the Pharma Industry, Economic Data, and Manufacturing
Pfizer shares rose by 1.3% after proposing a cost-cutting program resulting from an anticipated drop in demand for COVID-19 products in the Fall. In contrast, Merck's shares remained static despite increasing their profit forecast for the year due to a lesser second-quarter loss than expected.
Caterpillar, a significant pillar of the Dow's stability, saw a 6.7% gain after reporting an increase in second-quarter profit. However, it also hinted at a potential decrease in sales and margins for the current quarter. Contrastingly, Uber’s shares fell by 4.6% after the company missed out on meeting second-quarter revenue expectations.
The U.S. second quarterly earnings are projected to show a 6.4% decline from the previous year. Although gloomy, the current forecast is a slight improvement from the 7.9% decrease predicted just a week ago (Refer to Refinitiv data).
On the economic aspect, U.S. manufacturing experienced a slowdown in July but displayed signs of potential recovery. A survey indicated a three-year low in factory employment, suggesting an upsurge in layoffs.
Despite the positive finish in July due to better-than-expected earnings and a strong economy under tighter credit conditions, mega-cap growth companies such as Tesla and Microsoft saw their shares decrease due to rising borrowing costs after a 4% increase in the 10-year treasury note yield.
The S&P 500 showed its might, attaining a 15-month high at the beginning of the week and is just 4.6% away from breaking its record closing level from earlier in the year.
As of 10:17 a.m. ET, the Dow Jones placed 35.72 points higher (0.10%), the S&P 500 slightly fell by 17.37 points (0.38%), and the Nasdaq significantly dropped by 114.54 points (0.80%). Mining stocks experienced a slump, falling by 0.3%, after indicators showed a decrease in China's factory activity in July.
Fluctuating Stocks: Norwegian Cruise Line, JetBlue Airways, and Arista Networks
Remarkably fluctuating companies included Norwegian Cruise Line, which sunk by 14% after predicting lower third-quarter profits as a result of increasing costs, and JetBlue Airways, whose shares plummeted by 7.6% after having to downgrade its yearly profit forecast due to the end of its revenue-sharing agreement with American Airlines. On the brighter side, Arista Networks surged 15.4% after forecasting quarterly revenues that surpassed estimations due to better than expected results.
In conclusion, July saw a reduction in bearish positions for global long/short hedge funds, according to a recent Goldman Sachs report, as these funds placed bets on stocks either falling or rising.
Norwegian Cruise Shares Plunge Amid Predicted Lower Profits Due to Rising Costs
Despite strong performance in the second quarter, Norwegian Cruise Line projected lower profits for the third quarter of the fiscal year. This prediction, affected by mounting expenses, resulted in a steep drop in the company's shares, falling by more than 13%.
Elevated costs have been an ongoing concern for most cruise operators. However, the industry has witnessed a surge due to pent-up demand for leisure travel. Many customers are opting for multi-activity cruises over pricier land-based vacations.
Last week, Royal Caribbean set the bar high by predicting an optimistic third-quarter profit and increasing the annual profit forecasts. This might have escalated the disappointment from investors towards Norwegian's slightly increased annual adjusted EBITDA, as remarked by Truist Securities analyst Patrick Scholes.
The Norwegian Cruise Line revised its annual adjusted EBITDA expectations, a critical profitability indicator, to range from $1.85 billion to $1.95 billion, marking an increase from the previous range of $1.80 billion to $1.95 billion. The company also elevated its profit prediction for 2023 from 75 cents per share to 80 cents.
However, the adjusted profit forecast of 70 cents per share for the third quarter falls short of analysts' mean estimate of 79 cents. Despite the company’s enforced price hikes on their tours, Norwegian Cruise is entangled in higher borrowing costs, inflation, a strong US dollar, elevated marketing expenditure, and increasing labor costs.
Total operating costs for Norwegian in the cruise sector surged 29% to $1.38 billion in the second quarter ending June 30. Competitor Carnival also projected profits below expectations for the third quarter. This suggests that despite increased ticket prices and constant demand, higher marketing and labor costs are eroding the company’s profits.
The company's share price fell more than 13% after this disappointing forecast, leading to a ripple effect with shares from competitors Carnival and Royal Caribbean. After Norwegian’s announcement, Carnival and Royal Caribbean’s shares fell approximately 4.1% and 2.2% respectively.
In spite of the fall, Norwegian's revenue observed an 85.8% growth, totaling $2.21 billion — surpassing estimates of $2.17 billion — in the reported quarter, which is reflected in their adjusted profit of 30 cents per share, beating the expected 27 cents.
Global Stocks Stall Amid Economic Data
Global stocks showed a wavering trend on August 1, 2023, as negative influences in factory activity in the Eurozone and China countered optimism for global economic growth and the potential stoppage of U.S. rate hikes. Oil prices stumbled while the dollar made another leap against the yen.
The mixed economic indicators led to a similar pattern on Wall Street. The Dow Jones Industrial Average modestly ascended 0.12% to 35,603.7, while the S&P 500 stepped down 0.29% to 4,575.84, and the Nasdaq Composite fell 0.6% to 14,260.44.
Despite missing quarterly revenue estimates, Pfizer saw a fractional 0.3% dip in its shares. Conversely, Merck & Co. enjoyed a 2.5% boost after raising its annual profit forecast. Caterpillar Inc gained approximately 4% despite issuing a warning of a likely fall in Q3 sales and margins.
In Europe, stock losses grew throughout the day, resulting in a 0.7% overall fall, following a 2% increase in July. Notably, HSBC shares climbed approximately 3% after announcing a $2 billion share buyback and an increase in its key profitability target.
Manufacturing activity in the Eurozone contracted at the fastest speed since May 2020, deepening the losses in the European markets. Contrarily, investors are readying for an end to the U.S. Federal Reserve's interest rate hikes, with last week's increase regarded as one of the ending steps in the current tightening cycle.
"The economy is slightly weaker than desirable, stirring concerns for earnings growth entering the second half of the year," stated Michael Hewson, the chief market analyst at CMC Markets, highlighting the general mood of the market today.
Oil prices hovered near Monday's three-month high because of signs of global supply tightening and resilient U.S. demand. However, U.S. crude fell 0.73% to $81.20 per barrel, and Brent was at $84.84, down 0.69% on the day.
The U.S. dollar continued to grow, hitting an all-time high of $102.27 against six major currencies for the first time since July 10. Meanwhile, signals of European inflation falling out of sync with the U.S. narrative suggested that central banks are nearing the ends of their tightening cycles.
This week is also set to witness the release of several vital US job reports, culminating in the monthly payroll announcement on Friday, which may provide further direction on the economic outlook.
Decline in Saudi Stocks Continues as Profit-Taking Persists; Qatari Stocks on the Rise
Saudi Arabian stocks continued their declining streak on August 1, 2023, as traders secured profits following the benchmark index touching a nine-month high the previous week. On the other hand, Qatar's index marked its 15th consecutive trading day in positive territory.
The Saudi benchmark index dipped by 0.5%, driven by a 0.9% fall in Al Rajhi Bank shares triggered by the lender trading ex-dividend. Additionally, the healthcare sector also experienced a drop with a 1.5% decrease in Dr. Sulaiman Al-Habib Medical Services.
Offsetting the falling Saudi market trend, the Qatari index climbed by 1.3%, marking its 15th straight session of gains, supported by a significant 2.8% leap in petrochemical producer Industries Qatar. The Qatari stock market's steady progression is backed by increments in natural gas prices and a steady rise in the banking sector, according to Farah Mourad, Senior Market Analyst of XTB MENA.
In contrast to the Gulf region downturn, Egypt's blue-chip index sunk by 0.5% as most of the included stocks suffered losses, leading to a decrease of 6% in the Eastern Company.
Overall, global oil prices exhibited indications of a decrease as profit-taking started after a July rally based on tightening global supplies and predictions of demand growth in the second half of the year.