Stocks tumbled this morning on underwhelming earnings, which fell short of historically low expectations. The Dow, S&P, and Nasdaq Composite all sunk at the open before paring back their losses through noon.
Tesla (NASDAQ: TSLA) provided the biggest bearish shock of the day when it revealed a 20% drop in net income year-over-year in addition to announcing a price cut for some of its vehicles. Margins have slimmed significantly for the electric automaker over the last few quarters. Today’s earnings release confirmed that the problem is only getting worse.
Unsurprisingly, TSLA shares plummeted 9% in response. AT&T (NYSE: T) and American Express (NYSE: AXP) disappointed shareholders, too. AXP reported a slight earnings “miss” while T confirmed subscriber growth fears.
Today’s poor string of earnings reports broke the S&P’s “win-streak” of the last few trading sessions. Up until today, 82% of stocks beat earnings expectations.
Now, though, only 62% of S&P stocks have surpassed estimates. There’s hope for a turnaround considering that just 16% of S&P stocks have reported, but with all the major banks – who enjoyed very, very low estimates – having already released earnings, the market may have more misses in store.
Today’s earnings disappointments helped bring yields lower, however, which likely cushioned the blow to rate-sensitive stocks. But investors still anticipate a rate hike at the May FOMC meeting, especially after Cleveland Fed President Loretta Mester delivered a hawkish speech this morning.
“I anticipate that monetary policy will need to move somewhat further into restrictive territory this year, with the fed funds rate moving above 5% and the real fed funds rate staying in positive territory for some time,” Mester said.
“Precisely how much higher the federal funds rate will need to go from here and for how long policy will need to remain restrictive will depend on economic and financial developments.”
In other words, we’re hiking by 25 basis points in a few weeks and we don’t plan on cutting any time soon.
As to what that means for stocks, Wolfe Research’s Chris Senyek offered his optimistic take on the situation.
“If the Fed stays the course, broad financial conditions should continue to tighten, the economy should decelerate into recession, and stocks should trade down sharply,” Senyek wrote in a grim note to clients.
And, like most analysts who have this view, he’s probably right. But until that happens, stocks could whipsaw viciously over the next few months as conflicting economic data continues to roll in.
The latest confounding stat came from the Conference Board’s Leading Economic Index (LEI), which fell 1.2% month-over-month (MoM) vs. -0.7% expected. The index is used to predict the direction of economic movement over the next few months and is comprised of components that have been somewhat reliable leading indicators in the past.
Orders for non-defense capital goods were the lone bright spot, rising 0.2% MoM while building permits contributed the most to the total index’s monthly decline, falling 0.28% MoM.
“The US LEI fell to its lowest level since November of 2020, consistent with worsening economic conditions ahead,” said Conference Board manager Justyna Zabinska-La Monica.
“The Conference Board forecasts that economic weakness will intensify and spread more widely throughout the US economy over the coming months, leading to a recession starting in mid-2023.”
As analysts repeatedly ask “Are we in a recession?” throughout the summer, markets should swing every which way until that recession finally hits. When it does, share prices should fall like many are predicting, all while bulls beg for rate cuts that Mester and other Fed hawks will be reluctant to provide.
