Win Streak Threatened: Tesla, Netflix Results Bring Pressure As Housing, Leading Indicators Data Awaited

(Thursday market open) Pressure surfaced early Thursday as investors assessed yesterday’s results from Tesla TSLA and Netflix NFLX. The Nasdaq (COMP) fell sharply in premarket trading, but the Dow Jones Industrial Average ($DJI) and its eight-session winning streak remained in the green.

Tesla’s earnings per share (EPS) outran analysts’ average estimate and its revenue met expectations, but shares fell ahead of the open as investors fretted over the company’s earnings call. CEO Elon Musk said “we’re in turbulent times” as he cautioned that the company might scale back Q3 production, media reports said. Meanwhile, Netflix missed analysts’ average revenue estimate and provided a revenue outlook that appeared to disappoint investors. Shares fell nearly 6%.

Despite the market’s reaction to Tesla and Netflix, earnings season is surpassing analysts’ pre-quarter estimates, though the bar was low and it’s still very early. More than 80% of S&P 500 companies reporting through Wednesday beat Wall Street’s earnings per share (EPS) estimates, compared with the 74% average over the last 10 years.

Fresh earnings news this morning included Johnson & Johnson JNJ posting results that topped analysts’ expectations and raising guidance. A big jump in its Med-Tech division sales fueled the strong quarter. Med-Tech includes the company’s cardiovascular, surgical, and orthopedic products, so the strength there could point to increased demand for medical procedures. American Airlines AAL also posted better-than-expected results and raised guidance, similar to the solid report from competitor United Airlines UAL late yesterday.

The banking sector is a mixed bag so far this earnings season. In contrast to the big banks, more regional banks are missing estimates: Several fell short on EPS, and higher funding costs remain a challenge.

Morning rush

• The 10-year Treasury note yield (TNX) jumped 5 basis points to 3.79%.
• The U.S. Dollar Index ($DXY) stayed above 100 at 100.36.
• Cboe Volatility Index® (VIX) futures inched up to 13.93.
• WTI Crude Oil (/CL) is steady at $75.51 per barrel.

Just in

The government’s weekly initial jobless claims report was the lightest in many weeks at 228,000. Consensus from Briefing.com had been 240,000, up from 237,000 the prior week. The four-week moving average—which is generally the best way to track this volatile data point—fell to 237,500, well below peaks above 260,000 a month ago. From this measure, the jobs market doesn’t appear to be slowing down much.

Overseas, the People’s Bank of China made no changes to its one- and five-year prime loan rates despite recent sluggish economic numbers. There’s debate in the markets about whether China might add more stimulus at some point.

Stocks in Spotlight

Tesla TSLA shares vacillated and then fell in premarket trading after sweet-and-sour earnings news for the electric vehicle maker. On the plus side, earnings per share (EPS) beat Wall Street’s estimates. On a less positive note, margin continued to narrow. Total deliveries rose more than 80% year-over-year to 466,140, but operating margins dipped below 10%. That’s down from 17% in Q3 of last year and perhaps evidence that competition and pricing wars are taking their toll.

Tesla said reduced average sales price (ASP) was a negative affecting both revenue and profit growth. Heftier vehicle deliveries and lower costs were tailwinds in the quarter, Tesla reported, and the energy storage business has grown markedly over the last year.

Netflix NFLX shares fell sharply after missing Wall Street’s revenue expectations, though the video streaming company did surpass analysts’ average earnings forecast. Subscriber growth in the quarter of 5.89 million was surprisingly higher than the 1.75 million analysts had estimated, and it represented a sharp sequential gain. Despite the subscribership climb, Netflix’s guidance on revenue looked light. The share weakness might reflect “sell the news” sentiment after the stock rose 50% since the start of May.

In other earnings news, IBM IBM beat analysts’ earnings estimates, reaffirmed guidance, and grew its gross margins, but the stock didn’t show much of a premarket reaction. Revenue was in line with Wall Street’s expectations.

Of the 38 major U.S. companies that reported on Wednesday, 26 matched or beat Wall Street’s revenue forecasts. Only 18 surpassed analysts’ revenue forecasts, an unusually low percentage. But it was only a single day. More than 60% of companies reporting so far this earnings season have outpaced Wall Street’s revenue expectations.

Tomorrow morning we’ll check in on earnings from American Express AXP, one of the top recent performers in the Dow Jones Industrial Average ($DJI). Last time out, American Express posted 22% Q1 revenue growth and reaffirmed its previous guidance. With consumer spending still resilient, it’ll be interesting to see if the company raises its outlook for the rest of the year. American Express’s results could also give investors insights into the health of other industries like travel and entertainment based on what cardholders spent.

Eye on the Fed

Futures trading indicates a nearly 100% probability that the Federal Open Market Committee (FOMC) will raise interest rates by 25 basis points at its meeting next week, according to the CME FedWatch Tool.

Economic data so far this week has been on the soft side, but that might be keeping people from worrying as much about future rate hikes. Yesterday’s June Housing Starts and Building Permits data was disappointing, partly reflecting the rising cost of lumber. Lofty interest rates also dragged down activity.

What to Watch

A large batch of data waits in the wings this morning, starting with June Existing Home Sales. The report, due shortly after the open, is expected to show sales at a seasonally adjusted annual rate of 4.25 million, down from 4.3 million in May, according to analyst consensus from Briefing.com. Existing home sales are down sharply from a year ago, partly because many people are reluctant to sell homes bought with affordable mortgage rates.

The Conference Board’s June Leading Economic Index (LEI) is also due out this morning. Analysts expect a 0.6% slip in LEI, according to Briefing.com. The LEI has declined in each of the last 14 months, which some economists say could point toward a possible recession.

CHART OF THE DAY: FOLLOW-UP? This six-month chart of the Cboe Volatility Index (VIX—candlesticks) versus the 10-year Treasury note yield (TNX—purple line) shows that when TNX rose versus VIX earlier this year, VIX ultimately moved sharply higher. It just took a month or so. Recently, TNX again sprinted ahead of VIX, but VIX hasn’t shown much movement. Nothing has to happen, of course, but it’s going to be interesting to see if VIX remains soft if Treasury yields stay elevated. Data source: Cboe. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Words to the wise: What companies say in their earnings press releases and conference calls get tracked on Wall Street for specific references. For instance, you might get a sense of how powerful inflation remains by counting how many times executives use the word “inflation” in their calls. If you worry about recession, that’s another word to track. And sometimes it’s what isn’t said that draws attention. JPMorgan Chase JPM CEO Jamie Dimon didn’t refer in last week’s earnings release to economic “storm clouds” on the horizon, as he did in Q1. He still cited potential risks, but not in such colorful language. JB Hunt Transport Services (JBHT)—a lower-profile company that’s nevertheless a useful economic barometer—used the dreaded “R word” in its earnings call Tuesday, calling the current environment “a freight recession.” A recession in one business segment for a single company doesn’t reflect the entire economy, which may indeed be in a “rolling recession” where different sectors lose ground over time rather than all at once. Listen for words like recession, inflation, interest rates, and currency pressures as more companies report.

Tokyo check-in: Get set this evening for inflation data from Japan, where prices have been rising at their fastest pace in years. Analysts expect 3.5% year-over-year inflation growth in June, up from 3.2% in May, according to Trading Economics. Earlier this week, Bank of Japan (BOJ) Governor Kazuo Ueda indicated the BOJ would continue its easy monetary policy, an announcement that firmed the dollar versus the yen. The BOJ meets next week. The dollar fell to 15-month lows recently on hopes the Fed might be close to ending its rate increases and ideas that the global economy might be improving. The dollar is often an asset people flock to in tougher times.

Hard up for cash: Getting green is harder these days, according to a new survey from the Federal Reserve. The rejection rate for loan applicants jumped to 21.8% in the 12 months through June—the highest level in five years, according to a Bloomberg report on the latest edition of the Fed survey. Overall credit applications declined to the lowest level since October 2020, Bloomberg noted, citing Fed data. Less access to cash reflects the impact of high interest rates and cautious lending. The 21.8% figure is up from 17.3% in the last survey, which was published in February before several bank failures. Auto loans appear particularly tough to obtain, the survey found. Consumers also had higher expectations of being turned down for auto and mortgage loans. This could serve as a warning sign for automakers, homebuilders, home renovation firms, and insurance companies. 

Calendar

July 21: Expected earnings from American Express (AXP), AutoNation (AN), and Regions Financial (RF)

July 24: Expected earnings from Domino’s Pizza (DPZ) and Whirlpool (WHR)

July 25: July Consumer Confidence and expected earnings from Alaska Air (ALK), Archer Daniels (ADM), Biogen (BIIB), Dow (DOW), Alphabet (GOOGL), General Electric (GE), General Motors (GM), Kimberly-Clark (KMB), Verizon (VZ), Microsoft (MSFT), and Visa (V)

July 26: FOMC rate decision, June New Home Sales, and expected earnings from AT&T (T), Boeing (BA), Coca-Cola (KO), Union Pacific (UNP), Chipotle (CMG), Meta Platforms (META)

July 27: Q2 Gross Domestic Product (GDP) first estimate, June Pending Home Sales, June Durable Orders, and expected earnings from AbbVie (ABBV), Baxter (BAX), Bristol-Myers (BMY), Honeywell (HON), McDonald’s (MCD), Ford (F), Roku (ROKU)

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