Tariff optimism helps drive US indices to new highs but Tesla is in reverse

Wall Street continued its upward momentum this week as a US trade deal with Japan created optimism there would be an agreement with the EU ahead of the 1 August deadline set by the White House.

The S&P 500 index hit another closing high, its tenth in 19 trading days, led once again by technology stocks, such as Alphabet. Nasdaq also broke records.

Heading the other way, however, was Tesla, which went into reverse after Elon Musk warned investors that the company could be in for ‘a few rough quarters’ as it transitions from EV leader into an AI and robotics champion.

This week also saw the return of the ‘meme stock’ phenomenon, where retail investors using social media sites, such as Reddit, club together to ramp the share prices of unloved stocks.

Back in 2021, when the craze first caught on, GameStop was a big favourite: this time round, stocks as diverse as camera maker GoPro, department store Kohls, doughnut chain Krispy Kreme and online real estate firm Opendoor were in favour.

All four names have been heavily shorted by hedge funds, which means any sharp upward move in their share prices can lead to a ‘short squeeze’ sending prices higher still and generating spectacular short-term gains for buyers.

Coca-Cola

Forecast-beating second-quarter results 22 July from Coca-Cola showcased the Atlanta-based drinks giant’s resilience in a tough economic environment.

Having already fizzed 12% higher year-to-date, the shares were broadly flat over the week at $69.66 - a classic case of it being ‘better to travel than arrive’.

Nevertheless, Coca-Cola still managed to hog headlines with its plans to offer Coke made with cane sugar in the US later this year, an announcement that came a week after US President Donald Trump said he’d spoken to the company about using US cane sugar in Coke, rather than high-fructose corn syrup.

Coca-Cola’s revenue rose 1% to a better-than-expected $12.5 billion in the quarter ended 27 June as robust demand in Europe, the Middle East and Africa offset weaker volumes everywhere.

Organic sales growth of 5% topped the 4.6% Wall Street consensus amid price hikes and product mix benefits, while earnings per share of $0.87 beat the $0.83 forecast due to productivity gains and easing currency headwinds.

For the full year, Coke narrowed its EPS growth outlook to 3%, the top end of its previously forecast, and reiterated guidance for 5% to 6% organic sales growth for the year.

Alphabet

Investors have had their doubts about Alphabet this year, yet the Google machine keeps going, growing, and beating expectations. The tech giant saw second quarter EPS and revenues above market forecasts, reporting $2.31 versus $2.17, on $96.43 billion compared to $93.9 billion, or year-on-year growth of 22% and 14%.

If ChatGPT and other AI chatbots were successfully disrupting Alphabet’s core search, as some predicted, you’d expect to see evidence. Yet search growth was impressively in the double-digits again, up 12% to $54.2 billion.

Google Cloud revenue, another crucial growth driver, surged 32% to $13.6 billion, with operating income more than doubling to $2.83 billion. That’s a revenue acceleration from Q1’s 28%. YouTube ads rose 13% to $9.8 billion.

Yet, Alphabet stock continues to trade at a steep discount to large cap tech peers, on a forward 12-month PE multiple of 19. Meta Platforms, Microsoft and Amazon - all due to report next week – are on 26 to 33 multiples.

Philip Morris

Shares in the world’s largest tobacco group Philip Morris fell sharply this week despite the firm raising its full-year earnings forecast.

For the three months to the end of June, the Marlboro maker posted revenue of $10.14 billion, which was shy of the Wall Street estimate of $10.33 billion, driven by a 1.5% decline in cigarette shipment volumes.

Investors were also disappointed in sales of ZYN nicotine pouches, with 190 million cans shipped against analysts’ forecasts of more than 200 million cans for the quarter.

Philip Morris has been at the forefront of the transition from traditional tobacco products to smokeless alternatives, which now make up around 40% of sales.

Chief executive Jacek Olczak said the business had delivered ‘very strong results with record net revenues and exceptional growth in operating income and adjusted EPS’.

For the full year, the firm raised top end of EPS guidance from $7.44 to $7.56, implying growth of 15% on last year. Even so, the stock fell more than 8% on the day of the report 22 July and continued to fall over the following days despite the market making new highs.