Weekly Update 10/24/2023
To Bear or To Bull?
Wall Street Mixed as Yields Ease, Earnings in Focus
Tesla’s Quarterly Profits Plunge 44%
MSFT & GOOGL Earnings Today!
Bitcoin Finally Moves Up!
Weekly Meetings:
INVESTMENT CLUB THURSDAYS 6 PM (BPC188)
INVESTMENT FUND THURSDAYS 7 PM (BPC188)
—Market Madness—
Stocks rise Tuesday after strong earnings reports and Treasury yields stabilize
Stocks rose Tuesday as investors focused on a fresh slate of earnings reports, and traders monitored the latest moves in Treasury yields.
The Dow Jones Industrial Average gained 245 points, or 0.7%. The S&P 500 and the Nasdaq Composite climbed 0.7% and 0.9%.
Coca-Cola reported earnings and revenue that topped estimates, sending the stock up about 3.3%. Spotify, meanwhile, popped 10% after the audio streaming giant posted third-quarter results that beat expectations.
General Motors shares ticked down 2.4% following better-than-expected third-quarter results. The company pulled its full-year outlook amid rising costs due to the United Auto Workers union strikes, however.
Alphabet and Microsoft are among companies posting results after the market closes. Other tech names reporting this week include Amazon and Meta.
But even if the roster of tech names reporting earnings this week beat Wall Street expectations, valuations for the broader field of these firms remain too high, according to Bahnsen Group chief investment officer David Bahnsen.
“No matter what results we see from big tech earnings this week, the results won’t justify their outlandish valuations,” Bahnsen said. “Even with the declines in big tech stock prices over the past three months, big tech stocks are still too expensive and are priced for perfection and then some, and that’s a dynamic that is not likely to end well.”
Around 150 S&P 500 companies are slated to report this week. Thus far, the season is off to a solid start. Roughly 23% of S&P 500 companies have already reported earnings, and 77% of them have posted earnings surpassing analysts’ expectations, according to FactSet.
Wall Street is coming off a mixed session as investors continue to watch the U.S. 10-year Treasury yield, which rose above the 5% mark before falling below that level. Rising yields have raised concerns about the state of the broader economy and pressured the stock market in recent weeks. On Tuesday, the benchmark rate fell 1 basis point to 4.83%.
Energy stocks lag
Energy stocks bucked the S&P 500′s leg up on Tuesday.
While the broad index rose about 0.5%, the energy sector fell 1%. It was the only of the S&P 500′s 11 sectors to trade down in the session.
Hess, Halliburton and Schlumberger led the sector down with losses of more than 2% each. The best performer in the sector, EQT, was up just 0.4%.
On the other end of the spectrum, utilities was the best performing sector in the session, rallying 2.6%. NextEra gave upward momentum to the sector with a gain of more than 7%. AES and Edison were the next best performers, with both up nearly 4%.
Third-quarter earnings scorecard
Here’s how third-quarter earnings season is stacking up with about 23% of the S&P 500 having reported results so far and releases from Alphabet and Microsoft on deck for after the close.
Of the companies that have reported results, 77% have beaten earnings expectations, while 60% have surpassed revenue expectations, while nearly 69% have topped sales expectations, per FactSet data.
Year over year, earnings are expected to decline by about 0.2%, while revenues are expected to rise 1.9%, based on the blended growth rate.
Investors should prepare higher rates, Morgan Stanley’s Brian Weinstein says
Investors should prepare for a new normal defined by higher interest rates, said Brian Weinstein, head of fixed income at Morgan Stanley Investment Management.
“I do think we’re getting closer to that tipping point where growth is impacted by higher rates,” Weinstein said Tuesday on CNBC’s “The Exchange.”
He recommended that investors own some Treasury Inflation-Protected Securities (TIPS), as well as some 5- and 7-year interest rates.
I Quit My $35K Job To Grow My Side Hustle – Now It Brings In $141 Million
Alphabet, Microsoft Have ‘No Room’ for Error as Tech Rally Fades
Stock bulls who rode megacap tech shares to double-digit gains this year have had little reason to stick around lately. Now they’re counting on earnings from Microsoft Corp. and Alphabet Inc. after markets close Tuesday to help restart the rally.
Rising rates have made already stretched tech valuations look increasingly expensive just as China and the US step up tit-for-tat regulatory restrictions. Israel’s war against Hamas has made risk assets a more dangerous bet. And the Federal Reserve’s next moves hang over it all. Still, with virtually nowhere else to turn in the equity market, Big Tech remains the most-crowded trade among fund managers, according to Bank of America Corp.
That’s prompted investors to pay up for protection against a selloff in Alphabet and Microsoft — two of the handful of heavyweights responsible for all of the S&P 500 Index’s advance this year. Investors are banking on them to deliver earnings growth big enough to push the stocks higher — or at least enough to justify this year’s gains.
“There is no room for them to falter whatsoever,” said Michael Mullaney, director of global market research at Boston Partners. “If you think about the amount of money that’s gone into index investing, particularly the S&P 500, if any one of these companies falter then there’s going to be selling pressure because everyone and their brother is overweight.”
The five biggest companies in the S&P 500 Index — all of them tech-related — generated the bulk of the index’s 10% gain this year. Add in a couple of other heavyweights like Tesla Inc. and Meta Platforms Inc., and that’s all of this year’s advance and then some. Bank of America’s fund manager survey showed last week that betting on more gains for Big Tech is seen as the most crowded trade.
Their earnings have been a key support: They’re expected to deliver average profit growth of 34% in the third quarter, according to analyst estimates compiled by Bloomberg Intelligence. The rest of the S&P 500 is expected to show a profit drop of about 5%. The benchmark index gained as much as 1% on Tuesday.
Microsoft’s and Alphabet’s results will be followed by Facebook owner Meta on Wednesday and e-commerce behemoth Amazon.com Inc. on Thursday. Apple Inc. and Nvidia Corp. are due to release results next month.
With so much riding on the group, there have been signs of skittishness among investors ahead of the week’s results, given the broader market’s retreat since August. Apple and Nvidia have each dropped more than 10% from recent peaks amid concerns about sales in China, which is locked in an ongoing tussle with the US over advanced semiconductor technology. Electric-vehicle maker Tesla has declined 10% after a disappointing earnings report last week.
Other hints lie in the options market. The cost of puts — which protect against declines in a stock — relative to the cost of calls — which profit if a stock rises — has climbed for megacap tech shares. That signals investors are increasingly seeking protection from share-price drops in the near-term. That’s a reversal from earlier in the year, when desire to chase upside in the stocks pushed up the cost of calls instead.
When Microsoft reports, much of the focus will be on the performance of its Azure cloud computing business, where sales are expected to rise 27% compared with the same period last year, according to the average of analyst estimates compiled by Bloomberg. Alphabet will give investors a glimpse into the rebound in the market for digital advertising that accounts for the majority of its revenue. The Google owner’s total sales are projected to rise 10%, which would be its best growth in five quarters.
Both Microsoft and Alphabet are seen as front-runners in generative artificial intelligence. So far, the technology hasn’t been a major contributor to financial results. However, analysts are expecting that to change in the coming year, making forecasts particularly crucial.
“We’re looking for reasons for the market to turn around and start to advance again,” said Jason Benowitz, senior portfolio manager at CI Roosevelt. “Given how prominent big technology companies are in terms of contribution to total earnings, the reports for big tech earnings could be a catalyst to turn the market positive.”
—CRYPTO CULTURE—
Bitcoin doubles for 2023, tops $35,000
The price of bitcoin briefly topped $35,000 for the first time since May 2022, bolstered by positive sentiment about a bitcoin exchange-traded fund and a flight to safety that led to a spike in short liquidations.
On Tuesday bitcoin was last higher by about 8% at $33,900.00, according to Coin Metrics. Late Monday night it reached as much as $35,113.29, its highest level since May 8, 2022. Bitcoin is now up 104% from the start of the year and 105% from its 2022 low.
The rally could be fueled in part by investors who were betting against the crypto asset scrambling to cover short positions, in other words, by a short squeeze. Bitcoin saw $275.45 million in short liquidations on Sunday, followed by another $100.44 million Monday, according to crypto data provider CoinGlass.
“The real catalyst that created the ‘god candle’ [Monday] and pushed bitcoin above $34,000 was the $167 million in short liquidations, mainly on offshore exchanges,” Ryan Rasmussen, analyst at Bitwise Asset Management, told CNBC. “I don’t think anyone expected the level of price action we’re seeing, and those investors who were shorting bitcoin in the $33,000 plus range are certainly feeling the pain of that surprise.”
The move, the first 10% move for bitcoin since March 14, lifted the rest of the crypto market. Ether and Ripple’s XRP rose about 4% each, while Solana token added 3%. Crypto equities got a boost too with Coinbase and Microstrategy up 10% and 12%, respectively. The biggest mining stocks also rose double digits. Marathon Digital gained 12% and Riot Platforms advanced 10%.
Last week, the SEC declined to appeal a court ruling by a key deadline in Grayscale’s lawsuit against it, sparking hopes a bitcoin-related ETF may be approved in the next few months. Momentum built as firms in the bitcoin ETF running updated their filings and major investors like Ark’s Cathie Wood and Galaxy’s Mike Novogratz emphasized that the SEC’s tone has shifted and that it’s now engaging positively with the industry.
A bitcoin ETF would give investors a way to gain exposure to bitcoin’s price movements without owning the cryptocurrency directly. Bitcoin is considered a highly volatile asset, and its price fluctuations are unpredictable.
Major financial institutions such as BlackRock, Invesco, Fidelity and Grayscale have been pushing for bitcoin ETFs and submitted applications to sell such assets, portraying them as safer investment options compared to direct crypto investments known for their speculative nature and price volatility.
Coinbase told CNBC this week it’s confident that a U.S. bitcoin exchange-traded fund will be approved by the U.S. SEC.
Investors watching closely
The crypto industry is closely watching such developments that could point to a comeback.
Over the past year, the sector has been embroiled in scandals and high drama such as FTX’s bankruptcy and Terraform and its CEO Do Kwon being charged in February for defrauding investors.
Bitcoin price reached an all-time high in November 2021, with values exceeding over $65,000 at that time. However, a year later, the value plummeted to around $16,000 in November last year. That was when Sam Bankman-Fried’s crypto exchange FTX collapsed and filed for bankruptcy.