It started as just another week of equities heading higher until earnings from Netflix and Tesla – both of which reported Wednesday after the close – wrecked the momentum, sending the NASDAQ down 2% on Thursday. Before I mention these two important data points, keep in mind that we have another big week coming up for earnings (173 S&P 500 companies reporting this week, including MSFT, GOOG and META), as well as rate decisions from the Fed (Weds, consensus +25bps) and ECB (Thurs, consensus +25bps). So back to Tesla and Netflix, both of which disappointed.
NLFX (2Q23 Letter to Shareholders here) had better-then-expected subscriber growth and strong cash flow, but missed on the top line, reflecting the fact that much of its subscriber growth continues to come from outside the US in lower-priced and lower-margin international markets. There is of course the disruption from the current writers and actor strikes to contend with, too. However, the company’s efforts to crack down on non-paying subscribers and to end the “too broad” family plans seems to be paying dividends.
TSLA (2Q23 Shareholder deck here) more or less delivered at consensus expectations for top and bottom lines. However, lower gross margins and heavy projected capital expenditures seemed to take a toll. Tesla’s gross margins are compressing due to (an intentional) product shift towards lower priced, higher volume models, not an unreasonable strategy given the fixed investment associated with the company’s production facilities. CEO Musk also laid out a robust capital expenditure plan for the coming quarters. This combination of factors seemed to spook investors, and the shares gapped down on Thursday.
In reality, the numbers for both companies were quite decent in my opinion, but both paid a price for their “untethered-to-reality” meteoric increase in their respective stock price this year. Neither remains cheap, although TSLA continues to defy gravity given the nature of its business, as you can see in the table below.
The fact is that to justify these sorts of valuations, quarterly results simply can show no chinks in the armour. (I consider NVDA in the same position as TSLA – both are extremely vulnerable given valuations.) With MSFT, GOOG and META reporting this week, investor expectations will again be very high although none of these companies are at the nose-bleed levels of TSLA. In fact, what might have helped TSLA and NFLX would have been to utter the magic words “AI” more often during their management call with investors and analysts! Having said this, the AI narrative doesn’t seem to have done much for chip manufacturer TSMC, which beat expectations but had a 10% decline in revenues and a 23.3% decline in net income vis-à-vis the same quarter in 2022 (report here). Ouch! This is an extract from the analyst call for TSMC that caught my attention, as management addressed economic headwinds:
“…the macro is weaker than what we thought. Three months ago, we were probably more optimistic, but now it's not. Also that is -- for example, China economy's recovery is actually also weaker than what we thought. And so the end market demand actually did not grow as we expected. So put all together, even we have a very good AI processor demand, it's still not enough to offset all those kinds of macro impact. So now we expect that the whole year will become minus 10%.”
MARKETS LAST WEEK
Even though the NASDAQ was lower on the week by 0.6%, the tech-heavy index remains up a whopping 34.1% YtD. Other US indices were spared some of the tech-driven pain, with the large-cap (and “more boring”) DJIA leading the US indices higher on the week. Perhaps we are at an inflection point with tech falling out of favour, and “anything but tech” shares running. I doubt that’s the case, but you never know. In the bond market, the US Treasury yield curve (2y-10y) inversion steepened (to negative 98bps), and the yield on the 2-year UST inched up 8bps in front of the Fed’s rate decision this coming week. The corporate bond market also remains firm even as concerns regarding global economic growth increase. Both the U.K. and Japan had some news that affected their market performance this week. Inflation was lower-than-consensus in the U.K. and core inflation month-over-month rose only slightly (ONS release here), which caused Gilts (10y yield down 22bps WoW) and UK equities to rally. Japanese CPI inched higher in June, although the Bank of Japan reiterated its view that it was not worried about inflation and will continue its ultra-accommodative monetary policy. This caused the recent gains in Japanese stocks to moderate and sent the Yen south. Also in Asia, China – which released 2Q23 GDP figures to start last week (here) – remains relatively speaking in a funk, and its inability to jumpstart its economy is certainly not helping the global economic outlook. Could we be shifting from inflation dominating sentiment to economic growth? I suppose this is inevitable at some point but – if this is the case and we are in transition – it has certainly been a long time coming.
If you would like to see details by asset class / market type, go to the section “The Tables” below.]
WHAT’S AHEAD THAT MATTERS?
Earnings quarter ended O/A June 30, 2023 (2Q for most companies):
I/B/E/S data from Refinitiv has 173 S&P 500 companies reporting earnings this week; Refinitiv’s summary for last week’s earnings for S&P 500 companies is here
“Magnificent seven” (six left, three this coming week):; MSFT, July 25; GOOG (Alphabet), July 25; META (Facebook), July 27; AAPL, Aug 3; AMZN, Aug 3; and NVDA, Aug 23
Central bank meetings:
Federal Reserve (FOMC): July 25-26 (+25bps expected), Sept 19-20 (with updated projection·
ECB: July 27 (+25bps expected), Sept 14
Bank of England: Aug 3 (+25bps expected) and Sept 21
Bank of Japan: July 27-28 (you can’t possibly ask!) and Sept 21-22
THE TABLES
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Global equities
US equities
US Treasuries
Corporate bonds (credit)
Safe haven and other assets
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