Stocks rallied this morning, led by a strong performance from the tech sector after Netflix (NASDAQ: NFLX) reported earnings.
The streaming giant got the day off to a positive start when it “beat” on EPS ($3.20 reported vs. $2.94 expected) and net subscribers (-970,000 subscribers reported vs. -2,000,000 expected).
Yes, Netflix lost 970,000 subscribers last quarter, but when the company reported Q1 earnings, it warned shareholders of a 2 million subscriber loss in Q2. Netflix’s disastrous Q1 earnings caused NFLX shares to crater in response earlier this year.
But that’s also why the stock jumped almost 5% higher this morning when Netflix revealed that Q2 wasn’t nearly as bad as expected. It helped that EPS surpassed estimates by a large margin, too.
Other streaming stocks – Disney (NYSE: DIS), Roku (NASDAQ: ROKU), and fuboTV (NYSE: FUBO) – ripped higher as well.
It was a breath of fresh air for tech investors who were worried about an impending “growth crunch,” especially after Bloomberg reported two days ago that Apple (NASDAQ: AAPL) was planning on cutting spending and hiring next year in anticipation of difficult economic conditions. The news caused a vicious intraday bearish reversal.
And sentiment could rapidly change once again when the Fed hikes rates next Wednesday. After this morning’s positive trading session, however, bulls may have the momentum they need to finally kick off a bear market rally.
“I think the evolution of this drawdown is playing out as you’d want it to be scripted,” said B. Riley Financial chief strategist Art Hogan.
“I think it’s likely that we’ve reached a point of capitulation that we can have a significant rally off of.”
The reason being that most corporations aren’t “missing” like Wall Street thought they would. Quarterly results haven’t been fantastic, but investor confidence is rising as a result of the “not great, not terrible” earnings season.
“Fears of a damaging U.S. recession also have receded a little in the rear view mirror with Wall Street closing at a three-week high following some more upbeat earnings reports,” said Hargreaves Lansdown analyst Susannah Streeter.
Next up is Tesla (NASDAQ: TSLA), which reports after the market closes this afternoon.
“We fully expect a difficult [Q2], based on continuing supply-chain issues and factory shutdowns,” Argus Research’s Bill Selesky said.
It should be noted that Tesla already warned shareholders several weeks ago that the company experienced a quarter-over-quarter drop in vehicle deliveries. This has historically been a good proxy for sales.
Analysts attempted to price this into their Q2 earnings expectations for the electric automaker. And though this prompted shareholders to brace for poor results, they could also be treated to a surprising “beat” like Netflix investors were this morning.
Corporations like to underpromise and overdeliver when it comes to earnings. That’s why they release profit warnings (or delivery warnings in Tesla’s case) ahead of earnings when the going gets tough.
Don’t be shocked if Tesla posts a big “beat” this afternoon due to analysts going overboard with their earnings downgrades. That’s a good omen for the major indexes as well given just how important the Big Tech stocks are in determining market sentiment, which hit 2008-like bearishness last month in anticipation of probably-too-pessimistic earnings expectations.
