Tesla Time: Automaker's Earnings Ahead, But Geopolitics In Focus Early As Risk-Off Sentiment Returns

(Wednesday market open) The earliest earnings are out of the way, setting the stage for Tesla TSLA and Netflix NFLX this afternoon. Meanwhile, investors have a full plate of company reports to digest before the opening bell.

There’s also a helping of geopolitical tension this morning, fueling “risk-off” sentiment. Major indexes fell in premarket trading while gold and bonds rose. A weak earnings report from United Airlines UAL was also in the mix, and crude oil hit a two-week high earlier following developments in Israel.

“Oil popped higher overnight and yields initially turned lower, so it seems like Middle East concerns were primarily driving things,” says Kevin Gordon, senior investment strategist at Schwab.

While the score isn’t final, the week’s first two sessions suggest stocks can climb or at least hold their ground despite Treasury yields surging toward 16-year highs.

The S&P 500® Index (SPX) slid 5% from late July through last Friday as the 10-year Treasury note yield climbed 13%. Then the SPX gained 1% Monday and Tuesday as yields climbed another 22 basis points. That doesn’t necessarily mean yields don’t matter. But it hints that investors may be digesting what would have looked like alarmingly high yields just a couple months ago. Even the tech-heavy Nasdaq 100 (NDX) and small-cap Russell 2000 (RUT), which tend to be more rate-sensitive, are up since Friday.

The strength reflects a positive start to earnings, solid economic data, and the containment (so far) of the Middle East conflict. Any of this could quickly change, putting pressure on stocks. But that might also push down yields by triggering an investor flight to perceived safety. Yields fell slightly this morning as geopolitical worries intensified.

Morning rush

• The 10-year Treasury note yield (TNX) fell 2 basis points to 4.81%.
• The U.S. Dollar Index ($DXY) is steady at 106.24.
• Cboe Volatility Index® (VIX) futures jumped to 18.33.
• WTI Crude Oil (/CL) fell slightly to $87.41 per barrel but earlier hit its highest point since October 4.

Just in

September Housing Starts and Building Permits data sent mixed signals, with starts coming in below the consensus estimate at a seasonally adjusted rate of 1.36 million and permits above expectations at a seasonally adjusted 1.47 million. Permits fell and starts rose from August, and the government also revised August starts lower.

Analysts had expected a moderate monthly increase in starts to an annually adjusted rate of 1.38 million, and a decrease in permits to an annually adjusted 1.45 million, Briefing.com said.

Permits are among the leading economic indicators. A rise might lead to more housing construction, which in turn could help make homes more affordable in a supply-strained market. Both data sets have been extremely volatile.

• United Airlines shares fell 5% in premarket trading after the company beat analysts’ earnings expectations but warned that high fuel prices and the Middle East conflict could be negative factors in Q4. Though investors appear focused mainly on the near future with airlines, it’s worth noting that United reported double-digit Q3 revenue growth and international strength, along with rising capacity. It also ratified a new contract with pilots. Still, shares were down sharply over the last three months even before this latest setback.
• Earnings this morning also included a strong performance from staples firm Procter & Gamble PG, though the company said a strong U.S. dollar could restrain fiscal 2024 sales growth. The company’s revenue rose 6% in Q3, more evidence of consumers remaining resilient.
• Shares of Morgan Stanley MS edged lower despite beating Wall Street analysts’ estimates. Softness in the firm’s investment banking business appeared to be offset by improved trading results. Still, the earnings beat comes with a grain of salt, as analysts had set the bar relatively low. Overall profit fell 10% year-over-year.
• Overnight, China reported better-than-expected Gross Domestic Product (GDP) growth of 4.9% in Q3—near the government’s 5% annual target and above the consensus view of 4.4%. That followed a 6.3% GDP rise in Q2 driven partly be easy comparisons to the year before.

What to watch

Data-wise, tomorrow brings September Existing Home Sales, Weekly Initial Jobless Claims, and Leading Economic Indicators. Claims have been closely watched recently as the jobs market remains in focus, and consensus is 211,000, according to Briefing.com.

Wall Street’s still buzzing about yesterday’s glowing September Retail Sales report. Sales rose 0.6% excluding autos. And control group retail sales, which removes more volatile components and factors into Gross Domestic Product (GDP), rose 0.6%.

Though the report raised concerns about a potentially more hawkish Federal Reserve and sent Treasury yields soaring, it’s another helpful confirmation—along with the September jobs and inflation data—that the economy caught a wave in Q3. There’s hope this could work its way into earnings results, a potentially positive development for stocks.

Stocks in spotlight

Mega parade: This afternoon brings Tesla and Netflix, two of the most closely watched stocks on Wall Street. Results could have an outsize impact on the overall market due to their heavy market capitalizations.

Ads and Adds: Netflix reports amid worries about advertising growth and its ability to expand margins. Subscribership gain is pegged at 6 million for Q3, Barron’s reports. The streaming video company missed Wall Street’s Q2 revenue expectations even as subscribership rose 8%. Questions include how long it might take for the firm’s crackdown on password-sharing and its ad-supported streaming venture to improve bottom-line results.

EV time: Despite a more than 130% year-to-date share price gain, Tesla (TSLA) faces its earnings call with new questions about how dominant the EV manufacturer can continue to be. Analysts project earnings to fall from a year ago, largely due to the automaker’s average 25% across-the-board price cuts this year. Bloomberg says the cuts placed Tesla’s Model Y nearly $4,000 below the U.S. average car price of $48,000.

Even so, a recent report from Cox Automotive suggests Tesla is losing U.S. market share to EV competitors, making this a possible discussion topic on the call. Earlier this month, Tesla reported Q3 production of 430,000 vehicles and delivery of 435,000 vehicles, and said a sequential drop in volume was caused by planned downtime for factory upgrades. Tesla shares have chopped around the last couple of months after charging higher last spring.

Eye on the Fed

Early today, the probability that the Federal Open Market Committee (FOMC) will raise its benchmark funds rate from its current 5.25% to 5.50% target range following its October 31–November 1 meeting was 11%, according to the CME FedWatch Tool. Odds that rates could be a quarter-point higher coming out of the December 12–13 meeting were about 37%, up from around 28% a week ago, possibly reflecting the recent firm U.S. economic data.

“In a vacuum, the strong retail sales report generally supports the case for tighter policy, but Fed officials are likely looking more at the inflation outlook than spending habits,” says Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research. “If inflation continues its downward trend despite the strength in the consumer, the Fed should elect to hold rates steady rather than hiking even more.”

Eyes will be on the Federal Reserve tomorrow when Fed Chairman Jerome Powell speaks around midday at an economic outlook conference. 

CHART OF THE DAY: BREAK AT PUMP NOT FURNACE: Consumers enjoyed a break at the gasoline pump but may be paying higher heating bills after natural gas futures (/NG-candlesticks) spiked and gasoline futures (/RB-blue line) slumped early this month. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Sector slump: Yesterday’s hot Retail Sales report suggests U.S. consumers spent freely despite high interest rates. So why did S&P 500 consumer discretionary stocks fare worst among sectors last week and second from the bottom over the last month? Weakness in automakers and airlines due to the United Auto Workers (UAW) strike and high jet fuel prices, respectively, appeared to dampen enthusiasm. There were signs of life recently as shares of Walmart (WMT) and Target (TGT) ticked higher. Amazon (AMZN) and Tesla are also up but off 2023 peaks. A busy period approaches with Tesla reporting today and General Motors (GM), Ford (F) and Amazon next week.

Earnings and the holidays: Consumer discretionary companies rank second in terms of positive Q3 earnings surprises, research firm FactSet reports, and analysts expect 22.1% year-over-year sector earnings growth. However, consumer discretionary has the third-highest forward valuation among sectors, research firm CFRA says, so anticipated earnings gains could be somewhat built in. One wild card is holiday sales. The “wealth effect” can help determine how much people spend on gifts, an analyst told CNBC Tuesday. If stocks and real estate values get a tailwind in Q4, that could lead to extra items in carts.

Heating bill: U.S. drivers got a welcome break this month as gasoline prices fell, helped by slower demand. A less welcome surprise could be on the way, however, in heating bills from local utilities. Natural gas (/NG) prices spiked early this month to peaks last seen in January above $3.40 per 1 million Btus, or British thermal units. The rally hinged partly on war in the Middle East and heightened due to a “short squeeze” in the market. That’s when investors with short positions (which generate profit if an asset price falls) find themselves forced to jump ship before losses pile up too high. More recently, prices fell as warm-weather forecasts and heavier supplies calmed the market. But wars in the Middle East and Ukraine remain unsettling as winter approaches. Europeans, who lost most Russian natural gas supplies, might hope for another mild cold season like last year’s that kept gas demand capped. If temperatures get chilly and heating prices sizzle, it could suppress consumer demand for discretionary items and elevate inflation expectations on both sides of the Atlantic. Maybe it’s time to lower the thermostat.

Calendar

Oct. 19: Initial Jobless Claims, September Existing Home Sales, September Leading Economic Indicators, and expected earnings from American Airlines (AAL), AT&T (T), Philip Morris (PM), Union Pacific (UNP), and CSX (CSX).

Oct. 20: Expected earnings from American Express (AXP) and Regions Financial (RF).

Oct. 23: Expected earnings from Whirlpool (WHR).

Oct. 24: Expected earnings from Archer Daniels (ADM), Coca-Cola (KO), 3M (MMM), General Electric (GE), General Motors (GM), Verizon (VZ), Microsoft (MSFT),Texas Instruments (TXN), and Visa (V).

Oct. 25: September New Home Sales and expected earnings from Boeing (BA) and IBM (IBM).

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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