First, the requisite acclimation: the stock market is overbought on a short-term basis and is likely due for a pullback. You might have heard that a time or two in various market narratives, but the market time and again has turned that narrative into the story of the boy who cried wolf.
Cry wolf long enough we suppose, and eventually there will be a wolf. Is today that day where the wolf roams on Wall Street or will it be yet another day that defies the boy’s cries?
Currently, the S&P 500 futures are down 13 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 126 points and are trading 0.8% below fair value, and the Dow Jones Industrial Average futures are down one point and are trading fractionally above fair value.
That mixed indication follows a slate of earnings results from some widely-held and actively-traded stocks, namely Tesla (TSLA), Netflix (NFLX), Johnson & Johnson (JNJ), IBM (IBM), Travelers (TRV), United Airlines (UAL), American Airlines (AAL), Las Vegas Sands (LVS), D.R. Horton (DHI), Abbott Labs (ABT), Taiwan Semiconductor Manufacturing Co. (TSM), and Philip Morris Intl. (PM) to name just a few.
The response to these earnings reports and respective guidance notes has been mixed, yet it is the pullback in Tesla and Netflix that is holding sway as the predominant market mover.
Tesla and Netflix both topped consensus earnings estimates, but TSLA is down 4.3% and NFLX is down 6.2%. It is important to note that TSLA was up 136% for the year going into its report while NFLX was up 62%. Accordingly, there is attempt to focus more on what maybe didn’t look so good in their reports as opposed to what was good.
In that vein, Tesla isn’t being lauded so much for delivering 47% year-over-year growth in revenue as it is being scorned for a decrease in its profit margins. Netflix isn’t being lauded so much for adding a much stronger than expected 5.9 million subscribers in the quarter as it is being scorned for its relatively soft Q3 revenue guidance.
These stocks, then, could be down this morning simply because they were up so much going into their reports, because when you make a move like they did, there is no room for imperfection in the near term.
In any case, the decline in these names has certainly set the tone for the Nasdaq 100 futures, breathing some life into the notion that stocks like this — and the stock market in general — is overbought and likely due for a pullback.
Still, even now there isn’t a big rush to exit the stock market. That can be seen in the S&P 500 futures and Dow Jones Industrial Average futures, which are signaling only modest changes when the opening bell rings. That seems to be the case because the wolf at this point seems only to be circling the mega-cap stocks and other growth stocks that have made huge moves.
That is understandable taking into account yet another encouraging initial jobless claims report. Specifically, initial claims for the week ending July 15 decreased by 9,000 to 228,000 (Briefing.com consensus 240,000). That is the lowest level of initial claims since mid-May when the S&P 500 was around 4,100 or 11.4% lower than where it is today. Continuing jobless claims for the week ending July 8 increased 33,000 to 1.754 million.
The key takeaway from this report is that it connotes continued strength in the labor market and presumably not much fear about an imminent and material drop-off in end demand knowing that initial jobless claims are a leading indicator.
Separately, the Philadelphia Fed Index for July checked in at -13.5 (Briefing.com consensus -9.0), holding reasonably steady with the prior month’s reading of -13.7. A number below 0.0 is indicative of contraction, so the July report suggests the contraction in manufacturing activity in the Philadelphia Fed region did not accelerate in July.
The June Existing Home Sales Report and the June Leading Economic Index will be released at 10:00 a.m. ET.
Treasuries were weaker ahead of this morning’s data but extended their losses after the initial claims print. The 2-yr note yield is up 10 basis points to 4.85% and the 10-yr note yield is up 10 basis points to 3.82%.
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Originally Posted July 20, 2023 – Wolf is roaming around mega-cap names and other growth stocks
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