Strong third quarter earnings results and guidance from some of the world’s largest banks such as JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) suggest that the consumer is in a far better shape than economist expected. This is even as inflationary concerns and the overall rising cost of living persists.
While the Federal Reserve is doing what it can lower inflation towards its 2% mandate, this has had, arguably, a larger effect on the stock market than on consumer sentiment. Entering this year, there were many predictions of an imminent recession. What we’ve seen, however, is that broad data continues to suggest that the U.S. economy remains resilient, coupled with a labor market that is better-than-expected with job growth still strong.
The strong banking earnings results boosted the Dow Jones Industrial Average on Friday which rose modestly by 39.15 points, or 0.12%, to close at 33,670.29. Leading the gains on the Dow were, among others, JPMorgan Chase (JPM) which rose 1.5% and UnitedHealth (UNH) which gained 2.4% on earnings. The S&P 500 Index ended down 21.83 points, or 0.50%, to close at 4,327.78, but the index did log its second consecutive week of gains. The tech-heavy Nasdaq Composite declined 166.99 points, or 1.23%, to close at 13,407.23.
The major indexes were much higher intraday, but they pulled back after University of Michigan’s closely watched consumer sentiment data, which was released earlier Friday, showed a spike in inflation. This pullback in stocks not only suggests that investors are mostly worried about what the Fed will do next, but there is now increased concern that the Fed might not be as close to ending its rate hike cycle as previously thought. There was once a belief that the Fed may begin cutting rates at some point in Q4, but that is now likely off the table.
The good news is, the Q3 earnings season is upon us. Heavyweight tech hitters such as the so-called magnificent seven stocks can push the entire market higher. Names such as Apple, Amazon (AMZN), Google parent Alphabet (GOOG , GOOGL), Meta Platforms (META), Microsoft, Nvidia (NVDA) and Tesla (TSLA) which have enjoyed tremendous gains on excitement in artificial intelligence, have pulled back tremendously and now look more attractively priced.
Whether their winning streaks will be revived depends on the earnings results they release in the next few weeks. But you won’t have to wait for long. Tesla is one of several names to keep an eye on for this coming week.
Netflix (NFLX) – Reports after the close, Wednesday, Oct. 18.
Wall Street expects Netflix to earn $3.49 per share on revenue of $8.54 billion. This compares to the year-ago quarter when earnings were $3.10 per share on $7.84 billion in revenue.
What to watch: Netflix stock has pulled back over the past three months, falling almost 20% compared with a 2.7% decline in the S&P 500 index. While the shares are still up 20% year to date, besting the 13% rise in the S&P 500 index, investors aren’t seemingly as chipper as they once were about the company’s prospects. The stock was up, at one point, 60% on a year-to-date basis. Netflix’s pullback has been part of large-cap tech valuation concerns ignited by rising interest rates. Meanwhile, investors who are on the sidelines want can see this recent decline as a buying opportunity. Currently trading at around $353 per share, Netflix still has potentially 30% returns based on its 12-month price target of $460. The company’s crackdown on password sharing, which should help boosts management’s Q3 guidance for revenue and profits, is one of many reasons Netflix is poised to reach its consensus price target. UBS analyst John Hodulik expects Netflix to add 6.5 million paid subscribers during the quarter. That’s higher than prior estimates of 3.6 million. Netflix is also operating more efficiently and is looking to capitalizing on existing 238 million global subscribers through ad-based plans. What’s more, the company is now consistently producing positive free cash flow which is slated to come in at $5 billion in 2023. This is driven by an expected one percentage point increase in the company’s operating margin, among other fundamental improvement. All told, the company’s growth initiatives are paying huge dividends. This makes a compelling case to remain invested in Netflix stock ahead of next week’s quarterly results.
Tesla (TSLA) – Reports after the close, Wednesday, Oct. 18.
Wall Street expects Tesla to earn 74 cents per share on revenue of $24.16 billion. This compares to the year-ago quarter when earnings came to $1.05 per share on revenue of $21.96 billion.
What to watch: As with several of its large-cap tech peers, Tesla (TSLA) stock has driven in reverse amid the recent pullback in tech. The shares have fallen more than 5% in the past 30 days, compared to 2.6% decline in the S&P 500 index. The recent decline coincides with the fact that analysts have lowered the company’s third-quarter earnings estimates on the heels of Tesla reporting what some are calling downbeat delivery data for the period earlier this month. Some estimates, ahead of the Oct. 2 delivery report, had been lowered to 456,000 from 473,000 at the end of July. The company, meanwhile, delivered 435,059 vehicles, which was down 6% sequentially. In an effort to boost deliveries, the EV giant has been in a vehicle price war for most of 2023 and has lowered its vehicle prices by roughly 25% year-over-year. The company is still anticipating a volume of 1.8 million vehicles for the year. However, with fourteen brand new EV models entered the fray during the third quarter, more competition is emerging. Tesla, meanwhile, is the only EV maker that consistently makes money. In this area, the company has little competition. Despite very aggressive reinvestment in the business, Tesla still has a massive cash hoard with relatively no debt on the balance sheet. All of this is coupled with robust free cash flow. The company has $23 billion in cash and just $900 million in low-interest debt. Until these fundamentals change, Tesla stock should be owned, not trade.
