This morning, the attention of Wall Street will be on both the economy and earnings, with several important reports due on both fronts. On the economic side, most of the news will come after the start of today’s trading session, with reports on the leading economic indicators and existing home sales to be released at 10:00 A.M. (EDT). Several regional Federal Reserve Presidents also are scheduled to speak on the economy and monetary policy later today. Before the opening bell, we learned that initial unemployment claims for the week ending April 15th totaled 245,000, higher than expected and another sign that the Federal Reserve’s attempt to slow job growth and ultimately drive wage inflation lower is starting to work.
The headline reports came from Corporate America, as several prominent companies reported results since yesterday’s closing bell. The releases made for mostly disappointing reading, and the equity futures are trading lower in response. Of note, all eyes were on the first-quarter results of electric vehicle producer Tesla (TSLA). The car company’s earnings per share of $0.85 matched Wall Street’s expectation, on a modest sales beat. However, shares of Tesla are down sharply in pre-market action on worries about the company’s narrowing gross profit margin on its automobile sales (it came in at 18.1% versus the 20.5% expectation). Several price decreases taken in recent quarters appear to be weighing on margins.
The Tesla margin struggles spooked Wall Street, which came into first-quarter earnings season worried that the price increases which have been implemented by many companies over the last year to offset input cost inflation are not sustainable. If those prices don’t stick, the implied customer resistance may start to hurt margins and ultimately the overall earnings quality of the S&P 500 companies. This possible margin compression may lead to weaker earnings in coming quarters and even a re-evaluation of stock price multiples.
Wall Street also was unnerved by a few releases that spoke to the health of the credit market. Shares of American Express (AXP) are pointing to a lower opening today after the company missed earnings forecasts in the latest quarter. The credit card processor blamed an increase in reserves, as the primary culprit behind the earnings miss. The credit card giant set aside more money to cover potential losses stemming from cardholders falling behind on debt repayments. Looking at the big picture, the American Express news is another sign that the U.S. consumer is starting to feel the ill effects of stubbornly high inflation and elevated borrowing costs. Likewise, news that Zions Bancorporation (ZION) witnessed a 16% drop in deposits last quarter and missed estimates for quarterly profits, as higher provisions to cover loan losses offset the impact of rising rates on its interest income, bears watching given the recent banking industry turmoil. Previously, investors in banks had been cheered by relatively modest pullbacks in the accounts of depositors at regional banks like ZION. Shares of most of the regional banks are trading lower in pre-market action.
There were some positive surprises on the earnings front. Old-line technology company International Business Machines (IBM) beat earnings expectations on widening margins, and its shares are pointing to a higher start today. Likewise, shares of hotel and casino operator Las Vegas Sands (LVS) are trading higher after the company surpassed revenue and earnings forecasts.
The major equity averages turned in a volatile performance yesterday, with some notable early selling retraced during the afternoon hours. The primary news driving trading came from overseas. Specifically, reports showed that inflation in the euro zone was stronger than the European Central Bank predicted in March. This raised concerns about stagflation on the Continent, which is historically not a good backdrop for the economy or the financial markets. Hence, the selloff both in Europe and, to a lesser extent, in the U.S. equity markets. Treasury market yields rose on the euro zone inflation news. Stagflation occurs when you get slowing growth during a period of stubbornly high inflation and increasing unemployment. The thought of inflation moving in the wrong direction in Europe drove some investors into more defensive sectors and away from some of the higher-growth areas like technology.
On the home front, worries about inflation have subsided a bit, with March consumer and producer price data showing some moderation in headline inflation figures. However, concerns about the overall health of the economy are picking up, prompted by weakening manufacturing, services, and residential sales activity in recent months. The report from the Commerce Department released last week showing a larger-than-expected decline in March retail sales raised concerns about the health of the U.S consumer sector, which accounts for roughly two-thirds of the nation’s gross domestic product (GDP) and was the pillar behind the nation’s economic recovery from the COVID-19 pandemic. On point, the Federal Reserve’s latest Beige Book summation of economic conditions (released at 2:00 P.M. (EDT) yesterday) showed that consumer spending is slowing down.
In a slowing growth environment, the larger technology names have historically been appealing, and most of the big tech names have performed well year to date. However, recent trading suggests that sector-based investing may not be the best strategy right now, with all the divergent variables that are driving equities these days. Instead, investors may be best served by looking at individual companies and weighing their investment merits. In general, we like the stocks of high-quality companies that have a history of generating steady earnings and cash flows during more difficult economic times, while maintaining their dividends. The stocks ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line typically fit this profile.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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