The attention of Wall Street will be on both the economy and corporate earnings this morning. At 8:30 A.M. (EDT), the Labor Department reported that initial jobless claims for the week ending April 16th came in at 184,000, which was a modest improvement from the already low previous week’s tally of just 186,000. However, the latest reading from the Philadelphia Federal Reserve showed that manufacturing activity in the greater Philadelphia area fell from 27.4 in March to 17.6 this month; the expectation was 21.9. This news comes on the heels of yesterday afternoon’s Federal Reserve’s Beige Book release. That compilation of anecdotal evidence on economic conditions in each of the 12 Federal Reserve districts showed that U.S. economic activity has expanded at a moderate pace since mid-February, and that the districts’ outlooks for future growth were clouded by uncertainty created by recent geopolitical developments and rising prices.
The equity futures, which were higher heading into the economic releases on earnings news, are still indicating a bullish start to the trading day stateside. We expect today’s trading to be driven by earnings results. That was the case yesterday, with the lead story being the news from Netflix (NFLX). Netflix shares tumbled by some 35% on weak quarterly results that included a surprising subscriber loss over the three-month period. That story prompted selling in many other technology names, especially those that were big winners during the height of the pandemic.
After yesterday’s closing bell, Tesla (TSLA) posted strong results, including significant beats on both the top and bottom lines. The report also showed that the gross profit margin allocated to its output of automobiles, excluding government credits, a metric closely followed by Wall Street analysts, came in at 30.0%, versus the consensus expectation of 28.9%. Shares of the electric vehicle maker, which fell yesterday ahead of the earnings release, are rallying sharply in pre-market action and playing a big role in the positive market sentiment we are seeing this morning. The NASDAQ Composite, which dropped yesterday and was down for the 3rd time in the last four trading sessions, is looking to retrace some of its recent losses.
The earnings news did not stop with the Tesla report. We received quarterly results from several large-cap companies across a broad range of industries since yesterday’s closing bell, including AT&T (T), Dow Inc. (DOW), American Airlines (AAL), and Carvana (CVNA). Our sense is that Wall Street will be looking at these companies, as well as the rest of first-quarter earnings season to see which ones are managing the inflationary pressures the best and still demonstrating an ability to pass along the higher costs to the consumer. We expect the stocks of the companies that are most successful on this front to be rewarded by investors. On point…
Shares of Procter and Gamble (PG) rose yesterday following the release of strong March-quarter results and raised prognostications. The consumer goods producer has been able to offset inflationary operating costs through higher prices. Wall Street is having a similar reaction to the strong results from fellow Dow-30 component Dow Inc. this morning, and that report should give a further boost to the index of 30 bellwether companies, which enters today’s session at a three-week high. Conversely, the shares of Carvana are getting punished after the used car dealer said that higher prices for used cars and rising borrowing costs are hurting sales.
Turning back to the economy, the Beige Book summation did little to change the narrative that the Federal Reserve Bank will be aggressive on the monetary policy tightening front in its attempt to rein in inflation. This will likely include the first half-percentage-point hike since 2000 during the height of the dot.com bubble at next month’s Federal Open Market Committee (FOMC) meeting. Investors should note that Federal Reserve Chairman Jerome Powell and St. Louis Fed President James Bullard are scheduled to speak today, with Mr. Powell addressing the International Monetary Fund (IMF) on the global economy. This comes after the IMF cut its global growth forecasts earlier this week.
The more-restrictive Federal Reserve will likely push bond yields, which rose this week, even higher moving forward. The yield on the benchmark 10-year Treasury bond is now within a stone’s throw of the 3.00% mark. This is not an ideal backdrop for the higher-growth stocks that are primarily valued on future earnings potential. Those potential gains when discounted back to present value terms at a higher rate don’t look as good. This often makes the stocks of those higher-growth companies less attractive and can lead to a sharp revision in a stock’s price-to-earnings valuation when a company reports disappointing results, as was seen yesterday following Netflix’s quarterly earnings release.
In general, the early returns from the first-quarter earnings season are showing good results from the value-oriented companies. We also think entities of this type, including many of those in the financial, energy, and materials sectors, are best positioned to weather the higher interest-rate environment, and that thinking will bring near-term interest in those names, as was seen with the initial reactions to the aforementioned financial results from Procter & Gamble and Dow.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
