Stocks struggled this morning as earnings season continued. The Dow, S&P, and Nasdaq Composite all traded lower through noon despite better-than-expected corporate earnings.
Netflix (NASDAQ: NFLX) got the session off to a bullish start by rallying 15% on unexpectedly strong subscriber growth. The streaming giant also beat on earnings (EPS of $3.10 vs. $2.13 expected) and revenue ($7.93 billion vs. $7.837 billion expected).
Netflix teased its upcoming ad-supported membership, too, which should only accelerate the company’s recent influx of new subscribers.
“After a challenging first half, we believe we’re on a path to reaccelerate growth,” Netflix said.
“The key is pleasing members. It’s why we’ve always focused on winning the competition for viewing every day. When our series and movies excite our members, they tell their friends, and then more people watch, join and stay with us.”
Netflix chief financial officer Spencer Neumann added that while Q3’s growth was a positive development for the company, “we’re still not growing as fast as we’d like.”
Neumann continued:
“We are building momentum, we are pleased with our progress, but we know we still have a lot more work to do.”
This was exactly what NFLX shareholders wanted to hear after a miserable year that saw the stock plummet over 60% from its 2021 high.
United Airlines (NYSE: UAL) also reported an earnings beat this morning and saw its shares rise over 7% in response. The mood on Wall Street was optimistic before trading opened.
Shortly after the open, however, Treasury yields surged again. Sentiment shifted bearish as the 10-year yield climbed above 4.10%, hitting a high unseen since October 2008.
It also represents an emphatic breakout past resistance at 4.00% should yields remain elevated through the close.
Worse yet for bulls, 4.00% is likely the baseline for the 10-year Treasury yield moving forward now that the breakout has occurred. Stocks simply won’t tolerate a sustained move above 4.00% for the 10-year yield, even if earnings continue to come in stronger than anticipated.
“On the plus side, corporate earnings season may help investor confidence somewhat, just given current oversold conditions and reduced expectations. That should help equities keep their footing, but until we see 2-year and 10-year yields start to decline we think traders and investors should remain wary of expecting too much from this rally,” said DataTrek Research’s Nick Colas.
It could also be argued that strong earnings would keep yields rising, as robust quarterly results would potentially increase the odds of a bigger Fed rate hike come November.
Couple that with the hot September CPI reading from last Thursday and you’ve got a worst-case scenario for bulls:
High inflation, better-than-expected earnings, and a Fed that has ample reason to increase the size of its rate increases.
Technical analysts have started to pick their S&P short-term “peaks” as a result.
Fairlead Strategies analyst Katie Stockton sees a few more bullish days for the broader market index before the next selloff arrives.
“The oversold bounce behind the major indices is taking pause, but we expect it to regain hold by the end of the week with our short-term indicators pointing higher,” wrote Stockton in a note this morning.
She believes the S&P could go as high as 3,914 (roughly 6% above its current price) prior to the next downturn.
That’s a tall hurdle to leap considering the index has failed to rally above its early October highs thus far. And, it may be an impossible endeavor should the 10-year Treasury yield stay above 4.00% heading into November.
