Reports are excellent, stocks are crashing: The phenomenon shaking Wall Street

Economists at the Pasternak-Shaham investment house conducted a weekly economic review addressing the major gains on Wall Street, the earnings season, and the exceptional numbers of some technology companies, focusing on chip giant AMD, the decline in oil, and the major summer trading event on the Tel Aviv Stock Exchange.

"A green week for the indices hides a phenomenon characteristic of the current earnings season: companies beat forecasts and are punished for it. By the close of Thursday, the S&P 500 rose by 2.9%, the Nasdaq by 3.8%, the Dow by 2.7%, and the Russell 2000 by over 2%.

Macro supported: the ISM manufacturing index jumped to 55.6, the highest level since May 2022, and the services index remained strong at 54.1. In the labor market, the picture is mixed: the ADP report indicated an addition of only 44,000 private jobs against a forecast of 70,000, but initial jobless claims remained very low at 199,000.

The combination of strong activity with a cooling labor market leaves the possibility of an interest rate hike in September on the table, after the Fed left the rate unchanged last week.

The earnings season presents an anomaly. Out of 382 companies in the S&P 500 that have already reported, 84.8% beat profit forecasts, compared to a historical average of about 68%. Yet, the market reacts with indifference or punishment.

A clear example is AMD. On Tuesday, the company published record revenue of 11.5 billion dollars, a jump of 50%, with data center revenue more than doubling to 6.7 billion dollars, constituting 58% of the company's revenue. Adjusted earnings per share amounted to 1.66 dollars. Despite a strong forecast of 13 billion dollars for the next quarter, the stock plunged about 9% in after-hours trading.

AMD entered the report after a rise of about 130% since the beginning of the year. The market had already priced in perfection, so any small deviation downward is a surprise. This is the same dynamic seen with Meta, Apple, SanDisk, and Western Digital.

The main message for portfolio managers: in the AI infrastructure sector, the quality of the report is no longer the determining parameter, but the gap between it and embedded expectations. This means the risk of capital loss has increased even where the business continues to grow.

The exception was Palantir, which proved that when the gap between performance and expectations is large, the market reacts accordingly. Revenue jumped by 93% to 1.94 billion dollars, and the company crossed a billion dollars in net profit for the first time, with shares jumping about 30%. SpaceX also published its first report since the IPO with 92% revenue growth to 7.8 billion dollars, but capital expenditures of over 18 billion brought the question of return on investment back into focus.

In the oil sector, WTI lost about 10% this week against the backdrop of an agreement between Iran and Oman regarding a shipping route in the Strait of Hormuz, and Brent fell by 8%.

We close in Tel Aviv, where one of the largest trading events of the summer took place. On Thursday, Palo Alto joined the TA-35 and TA-125 indices. The company, trading at a value of about 880 billion shekels, generated demand of about 800 million shekels, with total orders exceeding 7 billion shekels. Local indices fell between 0.5% and 2.7% due to dual-listed companies absorbing the chip meltdown on Wall Street. The dollar climbed to about 3.01 shekels.

What is expected in the coming week? The employment report for July is published today, with a consensus for an addition of about 80,000 jobs and an unemployment rate of 4.2%. An especially strong figure will actually be problematic for the markets, as it will bring the hike scenario back to the table with force."