🎙️ Billions Forgone

Much has been made about the stock market’s performance under various presidents, but the truth is that, by and large, the market doesn’t care which party runs the country.

Our charts of the day show the S&P 500’s performance since 1948. The main conclusion from a quick glance is that the market spends a lot of time chugging higher, regardless of who’s in office.

Also noteworthy: Today was the worst day of the year for stocks, with the S&P 500 down over 2% and the Nasdaq down over 3%, thanks largely to disappointing earnings from Tesla and Alphabet. More on that below.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Stocks slide after Tesla, Alphabet earnings

• The 401(k) mistake that costs savers billions

This, and more, in just 5 minutes to read.

Chart(s) of the Day

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In The News

😬 Stocks Slide After Tesla, Alphabet Earnings

Tesla and Google-parent Alphabet reported second-quarter earnings Tuesday, delivering mostly disappointing results that weighed on stocks. Here’s what you need to know:

Tesla

Before Tesla Inc.’s earnings report, investors were hopeful for signs of stability in the electric car business and an imminent self-driving vehicle. But they were pretty disappointed.

Quarterly disappointment: Tesla's stock plummeted up to 13% on Wednesday, prompting several analysts to slash their price targets and downgrade ratings. Instead of bolstering investor confidence, Tesla reported another quarter of disappointing profits. CEO Elon Musk reiterated previous promises about leading in autonomous cars but confirmed a delay in unveiling the Robotaxi, a self-driving car.

• The dismal results were primarily due to auto margins. It comes after the stock’s 85% rise from early April to early July, driven by speculation around AI advancement. The second-quarter results highlighted a disconnect between market hype and reality.
  

• Tesla's earnings missed estimates for the fourth consecutive quarter. Automotive gross margins fell to 14.6% from 16.4% in the previous quarter. Given the lack of new progress in AI, analysts expect shares to retrace recent gains.
  

• The stock's high valuation, nearly 80 times forward earnings, poses a challenge without a strong catalyst. Analysts warn that the October Robotaxi announcement may not meet high expectations, too. 

Bottom line: Tesla's latest results failed to alleviate concerns about its earnings amid a broader demand EV slowdown, leaving investors wary of its growth prospects.

Alphabet

Alphabet's shares fell over 5% on Wednesday following the release of its second-quarter earnings report, which revealed a slowdown in advertising sales growth, particularly on YouTube. That deceleration in advertising revenue growth raised a few concerns.

Key highlights from the earnings report include:

• Revenue of $84.74 billion, surpassing analysts' expectations of $84.21 billion
  

• Net income increased 29% year-over-year to $23.62 billion, beating forecasts of $22.9 billion
  

• Earnings per share of $1.89, exceeding the projected $1.84
  

• Google ad sales grew 11%, down from 13% growth in the previous quarter

While Alphabet beat overall revenue and earnings expectations, investors seemed concerned about slowing ad growth — particularly in the YouTube segment — and Alphabet's capital spending, which was higher than anticipated at $13.2 billion compared to estimates of $12.2 billion. (The increased spending is primarily directed toward AI and computing power investments.)

Future margin expansion is also to blame. Executives mentioned factors that could impact margin expansion in the third quarter, including potential headcount increases and higher depreciation expenses related to technical infrastructure investments. 

Where’s the excitement? There was also a lack of “excitement” that defined previous earnings results, so some analysts pointed out that fewer positive surprises disappointed investors. 

• Alphabet announced it would pay a dividend of 20 cents per share in September, continuing its recently introduced dividend policy.

Not great, not bad: Its push into artificial intelligence remains a key focus. CEO Sundar Pichai emphasized the value of investing in this "transformative area. 

To be sure, Alphabet's results were generally positive, but the market reaction suggests investors are closely watching the company's ability to maintain a rapid pace of growth and profitability amid increasing competition and regulatory scrutiny. Valuations are rich, and expectations are high for big tech right now. 

The question remains: Is Wednesday’s market selloff a harbinger of more to come, or just a temporary reprieve after a scorching tech rally?

Read more

More Headlines

📈 32 charts tell the story of markets and the economy in 2024

📱 Apple likely to release foldable iPhone as early as 2026

📉 Amazon is bleeding billions of dollars from Alexa speakers

🎧 Spotify posts record gross margin, profit, and cash flow for Q2

🏦 U.S. regulator finds weak risk management at half of large banks

📉 The 401(k) Mistake Costing Retirement Savers Billions

Workers are missing out on big investment gains by inadvertently leaving their retirement savings in cash after switching jobs. 

The issue arises when savers roll over their 401(k) balances from their previous employer's plan into an Individual Retirement Account (IRA). According to research from Vanguard Group, the transferred funds frequently remain in cash until the account holder selects new investments, which many fail to do. Get this: Nearly one-third of those who rolled over their savings into IRAs at Vanguard in 2015 still had their balance in cash seven years later.

• One survey of over 500 Vanguard IRA clients covered investors who completed a rollover in 2023 but were still in cash in June. Of those investors, about 68% didn’t even know how their IRA money was invested.

Billions forgone: The oversight is costly. Vanguard estimates that Americans with cash-heavy IRAs forgo more than $172 billion annually in potential retirement wealth that could have been generated through investments in stocks and bonds. 

• The problem is particularly prevalent among younger workers who are used to automatically investing their savings in company plans. Such workers risk missing out on years of potential gains that could compound over time, building their retirement wealth. Older savers also face risks, as they often need some stock exposure to ensure their money lasts through retirement.
  

• The issue is exacerbated by the growing prevalence of IRAs, which now hold $14.3 trillion in assets compared to $11.1 trillion in 401(k)-type plans. 

Case study: The Wall Street Journal profiled one couple that had rolled over more than $400,000 from a 401(k) to an IRA the previous year, only to find the money sitting in cash, missing out on nice market gains — potentially around $100,000 had the money been invested in something like an S&P 500 index fund.

• There are several options for handling retirement savings when switching jobs, including keeping the 401(k) balance with the old company, rolling it into a new employer’s plan, or moving it into an IRA. But IRAs typically require the saver to invest the funds themselves. That’s where millions of Americans have gone wrong.
  

• The Vanguard study found that 28% of rollovers into IRAs remained uninvested for at least seven years. Advisors say many account holders delay making investment decisions because they are overwhelmed by the numerous options available or mistakenly assume that their IRA custodian will automatically invest their savings for them.

Cash Forever: One nurse in Cincinnati recently found out that her IRA had been in cash since 2016, resulting in major lost gains. Her former employer had rolled her pension into the IRA without her knowledge. Had the funds been invested in stocks, her balance could have been more than double its current amount, according to her advisor.

• Another financial advisor commented, “Without reminders to move the money out of cash, many IRA investors would stay in cash forever.”

Why it matters:

Despite Wednesday’s major selloff, many stocks are sitting near all-time highs. For people invested in the right assets, their wealth has ballooned in recent years. Others aren’t so lucky — partly because of this 401(k) mistake.

Since the Federal Reserve began raising interest rates in 2022, returns on cash-like investments have improved, but they still fall well short of the long-term gains from stocks: U.S. large-cap stocks have gained an annualized 7.19% since 1926, compared to just 0.31% for cash.

• Vanguard’s research also suggests that defaulting IRA rollovers into diversified investments, such as target-date funds, could increase retirement savings. Such a policy change could add over $100,000 to the average IRA balance by the time an investor under 55 reaches age 65.
  

• But implementing such changes would require legislative action, as IRAs are subject to different rules than 401(k) plans.

Read more

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Quick Poll

On Monday, we asked: Do you believe there are fewer quality, attractive stocks available today compared to previous years?

— About two-thirds of investors believe there are fewer attractive stocks available. “The returns offered are just not the same.”

— Another said there are fewer opportunities, at least in the U.S. market. “More people are chasing well-valued stocks, making it harder to find them in the US market, at least.”

— On the other end, one investor wrote, “Fewer stocks, yes, but as many or more quality stocks.”

See you next time!

That's it for today on We Study Markets!

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