Disney Could Be In Spotlight Today As Entertainment Giant Reports Earnings

All eyes seem to be on the big “I” as investors focus on inflation with two gauges of prices coming in hotter than expected this week. But it also seems that investors may be coming to grips with the prospect of higher prices, especially those that buy into the Fed’s view of “transitory” inflation.

The government’s April producer price index registered a 0.6% increase, ahead of a Briefing.com consensus forecast of a 0.3% gain. The PPI news comes one day after the government’s April consumer price index rose far more than expected, with the core CPI gaining 0.9% when a Briefing.com consensus had expected that inflation metric to rise just 0.3%.

The market, as gauged by equity index futures this morning, didn’t seem to react too much initially to the producer inflation data. Despite concerns about inflation, it appears that yesterday’s bad news on the inflationary front cushioned the blow of the PPI data somewhat. It may also be that the PPI news is somewhat offset by a better-than-expected reading on initial jobless claims, which came in at 473,000 when 510,000 had been expected in a Briefing.com consensus.

Rising inflation has been worrying Wall Street as investors fear the Fed may have to respond by tapering its asset purchases or raising its key interest rate sooner than expected. Inflation expectations have also been hurting growth stocks, including big tech-related names, because expectations of rising costs can dent the outlook for profitability for these companies.

The Gas Pipeline Metaphor

But at least some of this was expected. To some degree, the reopening of the economy was bound to have a “coiled spring” effect on demand, but with supply still coming online after a lengthy shutdown, it’s a mismatch that could be transitory. It’s kind of like those looking to buy gas on the East Coast. Though the pipeline has been restarted, it will be a little while before the local markets stabilize.

Despite the selling this week, it’s worth remembering that we’ve seen record highs recently, so stocks were probably due for a bit of a pullback. Some of the selling in recent weeks has been cushioned by a buy-the-dip mentality in tech stocks. While that seems like it may be the case again today, we’ll have to see if investors keep turning to that playbook.

In corporate news, Tesla TSLA made a U-turn on bitcoin. The electric vehicle maker has stopped accepting the cryptocurrency for automobile purchases out of concern about “rapidly increasing use of fossil fuels for bitcoin mining and transactions,” according to a tweet from CEO Elon Musk.

He said the company won’t be selling any of its bitcoin holdings and would use it for transactions “as soon as mining transitions to more sustainable energy.” Nevertheless, bitcoin was down more than 7% this morning, and other cryptocurrencies appeared to be falling in sympathy, despite Musk saying cryptocurrency is a “good idea” that “has a promising future” and adding that Tesla is looking at cryptocurrencies besides bitcoin that use less than 1% of bitcoin’s energy per transaction.

Technically Speaking

Something that requires close attention today is the technical picture. Despite yesterday’s steep selloff, the S&P 500 Index (SPX) wasn’t able to take out its 50-day moving average at 4050 (though futures did dip below the 50-day in the overnight hours this morning). 

Holding the 50-day isn’t a lot to grab on to after a day like Wednesday, but the fact that the SPX’s 50-day has held thus far might be something the market can hang its hat on. For what it’s worth, the 50-day got tested twice in March and held up both times.

The news from the Nasdaq-100 (NDX) wasn’t so hot technically yesterday. It’s now well below its 100-day moving average, closing Wednesday near 13,000. There’s a long dive from there to the 200-day moving average down under 12,500 (see chart below).

Disney, Airbnb Earnings Could Be Reopening, Inflation Barometers

As noted here yesterday, the big earnings report to watch later is Disney DIS. With DIS, two outstanding questions are how the theme park business is doing now that Disneyland is welcoming visitors, and whether the same streaming subscriber challenges Netflix NFLX reported in Q1 affected DIS. Some analysts are also wondering if DIS might start to consider bringing back its dividend, one of the victims of Covid. 

Also, listen on the DIS call if they mention anything about having any trouble finding workers to take care of those resorts and theme parks. Shortages of workers are something a couple other  companies have mentioned, and could play into inflation fears. 

There’s high demand for workers all over the economy, something we saw in Tuesday’s Job Openings and Labor Turnover Survey (JOLTS) report. If people want to stay home due to Covid or because they’re getting government benefits, companies might have to raise their pay offers to get people back. And rising wages can often trigger even more inflation. A huge company like DIS—with its hands in so many parts of the economy—can sometimes be a good barometer of the jobs and wage picture, so it’s kind of helpful that they report today right after this inflation data from the government.

One thing you don’t need DIS earnings to tell you is evident every time you drive, especially in a big city like Chicago where premium gas prices are now above $4 a gallon. When gas prices start to escalate, this may be something that affects consumers pretty quickly in their pocketbook and you wonder how much this will affect driving plans as well as business for hotels and restaurants. Airfares still look pretty cheap, but anyone who follows the markets knows how vulnerable airline profits are when jet fuel costs start going up.

The other earnings report to watch this afternoon is also related to the reopening economy as Airbnb ABNB opens its books. The key number to watch from this newly-public vacation rental company is gross bookings, which were hurt by the pandemic. There’s speculation, however, that companies like ABNB may be able to outpace hotels because they’re offering people a house of their own, not a room connected to hallways, elevators, and lobbies.

HART OF THE DAY: HIGH-TECH LOW PRINT. Wednesday’s selloff took futures on the Nasdaq-100 Index (/NQ—candlestick) down below its 100-day moving average (purple line). While it was a sizable one-day move, /NQ is still well above its 200-day moving average (blue line) In the early going Thursday it looks like some may be buying the dip.  Data source: Nasdaq. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Beyond Inflation, Other Troubles Fester: For many, it’s easy to blame inflation for the market’s troubles. We’ve certainly written about it enough in this column. However, even without the price pressure, stocks might be facing a tough path. Recent lackluster trading suggests to some analysts that most of the good news on the economy and earnings might already be priced in, with tough comparisons looming in 2022. Remember, the market tends to “trade ahead.” That’s why so many people wondered last year why stocks gained ground as the economy sputtered. The answer was 2021. Now that the economy seems to be ready to fire on most cylinders, again Wall Street is focused on what happens next, after the party is over, so to speak. 

On The Margins: In the same vein, investors appear to be looking beyond today’s improved company profit margins and toward possible tightening of those margins in coming quarters if inflation continues to be a factor. Right now, S&P 500 profit margins look like they’re in great shape, with the blended net profit margin for the S&P 500 at 12.6% in Q1, according to research firm FactSet. That compares to the five-year average of 10.6%, and would be the highest since FactSet began tracking the metric in 2008, if it holds for the entire earnings season. Nine sectors are reporting a year-over-year increase in their net profit margins in Q1.

Rising costs threaten these margins, and perhaps put a bit of a cloud over the earnings picture heading forward. As of last week, earnings growth projections for Q2 and full-year 2021 look excellent if they come anywhere near the 56.7% and 30.9% expected by research firm CFRA. However, 2022 earnings growth already faced tough comparisons to 2021 and is only seen rising 11.8%, according to CFRA. If inflation continues—and remember one month of data isn’t a trend—it’s possible analysts might have to cut back some of their expectations for 2022 earnings growth. As noted yesterday, some companies enjoy pricing power and can possibly benefit from inflation, especially in the Staples, Materials, and Energy sectors. Others, not so much, and narrowing margins could mean narrowing profits.

Take Me To Your Leader: One problem for the market is its missing leaders. Remember that over the last few years, we could almost always count on stocks like Apple AAPL, TSLA, Microsoft MSFT and other Tech “mega-caps” to find buyers when times got rough. This put kind of a net under the market, though there were times when those big names did lose ground. The market tended to take it on the chin when they did, particularly in late 2018 when Tech fell off a cliff and the SPX followed, almost dropping into bear market territory (down 20% from highs).

We’re not saying that’s going to happen again now (though there’s every reason to believe it will eventually, because bear markets are a normal part of the cycle). One level to watch is $122.96 for AAPL. That’s the stock’s 200-day moving average, something AAPL hadn’t closed below since April 2020—until yesterday, when it dropped 19 cents below. One day isn’t enough to be definitive, but a few days below the 200-day MA could mean more trouble ahead, and not just for AAPL. “A violation of this key technical level could cause added pressure to other technology stocks given Apple’s mega-cap status and inclusion in many ETFs/holdings,” Briefing.com noted Wednesday. 

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

Image Sourced from Pixabay