Making sense of the markets this week: August 4, 2024

Mixed results for Magnificent 7 

The narrative around the Magnificent 7 mega-cap technology stocks has become mixed, even in the face of mostly positive earnings news.

Microsoft stock sold off on Tuesday even after the company narrowly beat Wall Street expectations for its fiscal fourth-quarter results and handily surpassed results from a year ago. Investors have been scrutinizing figures for AI operations in particular; Microsoft’s Intelligent Cloud revenue rose 19% year over year and contributed 8 percentage points of growth to its Azure and other cloud services revenue, which grew 29%. Evidently, that wasn’t enough.

Facebook and Instagram owner Meta Platforms, by contrast, easily bested analyst forecasts for the second quarter. It boosted net income by 73% over the same quarter last year and is gaining advertising market share over archrival Alphabet. Compared to its Mag 7 peers, Meta has been a stock-market laggard since 2022 but undertook a cost- and job-cutting campaign that now appears to be paying off.

Apple likewise surpassed expectations for revenue and earnings, posting particularly strong results in its iPhone and iPad divisions. Cloud services, computers and wearables were in line with estimates.

Amazon was punished after missing the analyst consensus for revenue, even though it beat estimates for earnings. Though Amazon Web Services performance was strong, the company’s core retail and advertising businesses disappointed.

The U.S. Fed stands pat for now

There were no assassination attempts or presidential nominees dropping out of the race for the White House this week. The news out of Washington, D.C. on Wednesday, however, was just as closely watched by markets. 

The U.S. Federal Reserve elected to hold its overnight lending rate at 5.5%. In a statement, the central bank’s Open Market Committee acknowledged signs of a slowing economy but said it would not cut rates “until it has gained greater confidence that inflation is moving sustainably toward 2%.” The market continues to pin its bets on a rate cut in September, which would be the first since 2020.

That leaves the Bank of Canada, which has cut rates in both of the last two months, a full percentage point below the U.S. Fed. The Canadian dollar nonetheless gained slightly against the greenback, at USD$0.72485, in the wake of the announcement, suggesting the policy decision was expected.

• Read more:
  Where are interest rates headed?
• Making sense of the Bank of Canada interest rate decision on July 24, 2024

Oil sands producers gush over Trans Mountain

Canadian integrated oil producers Canadian Natural Resources and Cenovus Energy both posted higher volumes and oil prices in the second quarter on Thursday; they provided further evidence that, regardless of massive cost overruns, the expanded Trans Mountain Pipeline has improved industry prospects since commencing operations in May. Cenovus said it had met its target for debt reduction and would be returning “substantially” more money to shareholders via dividends and share buybacks in the foreseeable future.

Reporting its own financial results a day earlier, oilfield services firm Precision Drilling Corp. (PD/TSX) noted a 25% increase in drilling rigs operating in Canada this year, while its U.S. rig count had declined. In a conference call, CEO Kevin Neveu attributed oil companies’ willingness to invest in new output on the better pricing enabled by the Trans Mountain Expansion.

Read more: Cenovus Energy reports earnings for Q3, reaches debt reduction target

Diageo sales slump a sign of falling consumer spending

U.K.-based Diageo plc—the world’s largest liquor producer—plunged 10% Tuesday to a four-year low. This occurred after reporting a 1.4% revenue drop to USD $20.3 billion in the most recent quarter, its first since 2020. Sales declined a whopping 21% over the year to June 30 in Latin America and the Caribbean, and North American sales fell 2%. These declines were offset somewhat by growth in Europe, especially from Diageo’s Guinness beer brand. (Diageo’s ticker symbol is DGE/L, while the ADR trades as DEO on NYSE.)

Along with a 1% year-over-year sales decline reported by McDonald’s (MCD/NYSE) on Monday, Diageo’s stumble is being interpreted as a sign of retrenchment in the consumer discretionary sector.

“The consumer environment continues to be challenging,” Diageo CEO Debra Crew said in a video posted to the company’s website. “Consumers remain cautious and interest rates are high therefore retailers are likely to remain cautious too.”

Read more about investing:

• Best ETFs in Canada
• Buying your first stocks in Canada
• How much is capital gains tax and other questions answered

About Michael McCullough

Michael is a financial writer and editor in Duncan, B.C. He’s a former managing editor of Canadian Business and editorial director of Canada Wide Media. He also writes for The Globe and Mail and BCBusiness.

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