Stocks have become volatile again after several months of stability. Stock indices are currently pulling back, and I’ve noticed more stocks declining on earnings days, and stocks open high but close lower. These are indications of poor market sentiment.
Yesterday, seven S&P 500 constituent stocks experienced drops of more than 5%, and these declines were not without reasons.
JB Hunt (JBHT), a logistics company, reported revenue of $2.94 billion and earnings of $1.22 per share, both of which fell below the expected figures of $3.11 billion and $1.53 respectively. Therefore, the sell-down is justified as new assumptions alter the stock’s valuation.
Travelers (TRV), an insurance company, also released disappointing results. Although its revenue of $11.23 billion exceeded estimates of $11.18 billion, its earnings of $4.69 per share fell short of the expected $4.92.
Prologis (PLD), which owns a vast portfolio of logistics real estate, also experienced setbacks on its earnings day. Although its revenue and earnings either beat or matched analysts’ estimates, the disappointment came from its guidance. The company lowered its earnings per share forecast from $3.20-$3.45 to $3.15-$3.35. In the current market environment, investors are quick to find reasons to sell, and companies releasing results cannot afford any disappointments. Tough luck indeed.
ResMed (RMD) manufactures machines for individuals with sleep apnea. Meanwhile, Eli Lilly, known for its blockbuster weight loss drug, has made a significant announcement. Its clinical trial for treating sleep apnea with tirzepatide, the same active ingredient used in its weight loss drug, proved effective. This development suggests that Eli Lilly could potentially introduce a new drug specifically for sleep apnea, providing patients with an alternative to using a machine while they sleep.
Autodesk (ADSK), renowned for its architecture software, is contending with a different kind of issue—it is delaying its annual report due to ongoing investigations into the company’s free cash flow and non-GAAP operating margin practices. Investors are concerned that this may indicate more significant problems ahead. There are worries about potential manipulation of financial figures, although management has stated they do not expect previously issued statements to change.
Lastly, two semiconductor stocks, AMD (AMD) and Lam Research (LRCX), experienced declines for a couple of reasons.
First, ASML reported its results, with revenue of 5.29 billion euros, falling short of the expected 5.39 billion euros. However, its earnings exceeded expectations, coming in at 1.22 billion euros against the anticipated 1.07 billion euros. Despite this, a 22% year-over-year drop in sales and a 4% decrease in net bookings, coupled with a significant reduction of two-thirds compared to the previous quarter, indicate that semiconductor demand has not rebounded. This resulted in a broad sell-off, with ASML leading the decline with a 7% drop, Arm down by 12%, and even Nvidia experiencing a 4% reduction.
The second reason for the drop in shares of semiconductor companies like AMD and Lam Research was that China reported a 40% surge in semiconductor production in the first quarter. Although these were not high-end chips, due to US restrictions, China is advancing in the production of legacy chips and moving towards self-sufficiency. Furthermore, China is mandating that its main telecommunications companies use local chips, as well as CPU chips for government computers. This shift could significantly reduce the revenues of Western chip firms that have historically relied on the Chinese market. ASML reported that nearly half of its revenue comes from China, while AMD and Lam Research have exposure at 15% and 26% respectively. Notably, both companies have seen their revenue contributions from China decrease in 2023 compared to 2022.
As we can see, there are clear reasons why these stocks have dropped more significantly than others, but whether such steep declines are justified remains debatable. I believe there is a knee-jerk reaction at play, and because investors are jittery, they tend to sell stocks at the first sign of trouble, which may lead to an undue punishment for these stocks.
However, I still view this as a market pullback rather than a significant correction or crash. In the long term, I remain bullish and consider this a potential buying opportunity, should the prices reach more reasonable valuations. Also, I do not expect the pullback to end anytime soon. So, hang in there.
