Interactive Investor

Will Tesla and Netflix shares join results season rally?

18th April 2023 13:11

by Graeme Evans from interactive investor

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Global stock markets are in a period of calm and quarterly results have been good, but a rush of earnings releases could change all that. There are also interesting ideas about what’s to come.

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Tesla (NASDAQ:TSLA) and Netflix (NASDAQ:NFLX) will post results this week against a backdrop of fading Wall Street volatility and with the early signs from the Q1 earnings season looking positive.

After JPMorgan Chase & Co (NYSE:JPM) and Citigroup Inc (NYSE:C) reassured investors following the recent banking turmoil, FactSet said 90% of the 30 S&P 500 companies to have entered the results spotlight so far had beaten earnings guidance and 63% managed a revenue surprise.

Despite this resilience, FactSet forecasts a year-over-year decline in earnings of 6.5% in what would be the worst quarter since Covid lockdowns triggered a fall of 31.6% in spring 2020. It will also represent the second straight quarter the index has reported a decline in earnings, as higher interest rates and rising costs squeeze bottom-line performances.

Week Two for the earnings season sees Netflix report figures after tonight’s closing bell, with its followers looking for the streaming giant to repeat the previous quarter’s outperformance as households opt to stay at home amid the cost-of-living pressures.

Electric car maker Tesla enters the fray on Wednesday evening, having delivered 422,000 vehicles for the first quarter but with Wall Street expecting a 17% decline in earnings due to ongoing cost pressures.

American Express (NYSE:AXP) and Philip Morris International (NYSE:PM) are set to post figures before Thursday’s opening bell followed by consumer goods giant Procter & Gamble Co (NYSE:PG) on Friday.

However, the US results season reaches its peak next week, when 40% of the S&P 500 is due to report, including mega-caps Microsoft Corp (NASDAQ:MSFT), Meta Platforms (NASDAQ:META), Amazon (NASDAQ:AMZN) and Alphabet Inc Class A (NASDAQ:GOOGL).

For short-term investors, such times are ripe for stock picking after Bank of America research going back to 2009 found price dispersion consistently higher on busier reporting days.

So far it appears that earnings season may not be a negative catalyst for a US market that only a month ago was rocked by the collapse of Silicon Valley Bank.

The best indicator of this stabilisation comes from the VIX index of implied stock volatility, which today stood below 17 for the lowest level since January last year.

UBS said the calmer mood suggested that investors only envisage a narrow range of outcomes for the US economy.

For now, consumer spending has remained well supported by a jobs market that is cooling but still robust, and profits are poised to benefit from continued improvements in supply chains, a sharper focus on cost containment and the weaker dollar.

And while the earnings season may not weigh on current market sentiment, the Swiss bank still sees reasons for investors to remain cautious on US equities this year.

Mark Haefele, chief investment officer at UBS Global Wealth Management, warns that tighter credit conditions in the wake of the banking turmoil have the potential to weigh on earnings.

He also believes the Federal Reserve has more work to do to get inflation back down to its 2% target. “Historically, the Fed has not cut rates when unemployment has been this low. As a result, we think the Fed will likely need to keep monetary policy restrictive, forestalling any re-acceleration in economic growth that could reignite inflation.”

Haefele points out that the S&P 500 trades on a forward price/earnings multiple of 18 times, which is near its highest in about a year and is higher than pre-pandemic levels.

He said: “Historically, when the S&P 500 has traded above 18x, consensus earnings growth expectations are robust (14% on average) or the 10-year Treasury yield is less than 2%. Today, we expect S&P 500 earnings per share to contract 5% in 2023 and the 10-year Treasury yield is 3.59%.”

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