Finimize - 😬 New trade tremors

What’s going on here?

ASML reported solid profits, but geopolitical tensions threaten to cloud the firm’s outlook.

What does this mean?

Netherlands-based ASML – Europe’s most valuable tech company – raked in €1.6 billion ($1.7 billion) in the second quarter, comfortably above analyst forecasts. And more importantly, the firm’s order numbers, which give an inkling of future profit, blasted surprisingly higher – to $6.1 billion, up from $3.9 billion the same period a year ago. But ASML, which sells some of the most advanced chipmaking machines in the world, is nonetheless keeping itself grounded: the company left its humble outlook for the full year unchanged.

Why should I care?

Zooming out: Choppy waters.

The AI boom and the breakneck expansion of data centers are keeping semiconductor firms like ASML in the money. But it’s not all smooth sailing (it never is). The US is now threatening to slap its harshest trade restrictions on companies supplying advanced chip equipment to China. The so-called “foreign direct product rule” would apply to any foreign-made products sold in China that include American tech. That’s a problem for the likes of ASML and Tokyo Electron, with China making up roughly 26% and 20% of their respective sales. So the news sent both companies’ share prices tumbling on Wednesday.

The bigger picture: Spoiling the party.

Regulations just might be a dead weight on the chip industry’s meteoric rise. Export rules that went into effect early this year have already slashed a hole in the pockets of American companies, with the Federal Reserve Bank of New York estimating a $130 billion hit to their combined market value. And if these new restrictions are approved, it’ll make that hole even wider. No wonder, then, that firms are urging policymakers not to take that next step, warning that global businesses might simply strip US products from their supply chains to dodge the new mandate.

What’s going on here?

A stock index of smaller companies just notched its best five-day streak since 2020, with David coming up trumps over Goliath for the first time in a while.

What does this mean?

Until last week, US small-cap stocks – companies with a market value between $300 million and $2 billion – had been essentially flat all year. But that changed when an inflation report showed US consumer prices rising a lot less than expected in June. The news had traders betting that the Federal Reserve will move to lower its economy-dragging interest rates a tad earlier this year, and that kick-started a good ole rally in the small-cap department. See, slighter firms often carry some heavy short-term or variable-rate debt, so they get hit harder when borrowing costs go up – but they also get a bigger boost when those costs go down. And that’s why the Russell 2000 index, which houses these stocks, shot up by almost 12% in the past week.

Why should I care?

Zooming in: Slow train coming.

The inflation report was the fuel that ignited the rally, sure, but the scene was set a while back. In the US, small-cap stocks have been underperforming their more sizable siblings since 2014. That’s left them trading cheap – really cheap. And that’s not just in comparison to big-cap shares, but also relative to their own history. So, naturally, they’ve become prime targets for bargain-hunting investors looking for a bit of risky business.

The bigger picture: The race is on.

Those investors rushing into small-cap stocks might find they’re onto a winner later this year. The bigger kids have been out in front recently, but it’s the smaller fries that appear poised to take the earnings growth lead. Analysts see them raking in 27% more profit this quarter compared to a year ago – and 67% next quarter. That’s significantly faster growth than what the weightier firms are expected to see.