Opening Market Update

Risk-Off Mood Dominates After Israeli Response

April 19, 2024 Joe Mazzola
Volatility hit a six-month high overnight after Israel responded to Iran's attack with a limited strike, then erased most of the gain. Major indexes traded near the flat line.

(Friday market open) Wall Street starts Friday on shaky ground with indexes mixed after Israel's limited strike against Iran earlier today. A risk-off mood dominates, boosting values of perceived "safe" assets including U.S. Treasuries and the dollar as volatility eased slightly from six-month highs recorded overnight.

Media reports suggested both sides tried to downplay the attack's significance, which reportedly caused little damage and followed Iran's launch of missiles at Israel last weekend. Still, worries of a wider war and its potential impact on crude oil dominate world markets and could drive participants away from riskier assets heading into the weekend. The Cboe Volatility Index®'s (VIX) sharp climb overnight to new 2024 highs above 20 demonstrates the uncertain outlook and suggests markets could move more quickly and dramatically in coming days. Anyone planning to trade might want to exercise extra caution and consider keeping trade sizes lower.

Crude teeter-tottered overnight, rising sharply on the initial news and then quickly losing ground toward recent three-week lows. Energy stocks could remain volatile in coming days as investors follow fresh developments, and it wouldn't be surprising to see defensive trading that traditionally favors sectors like consumer staples, health care, and utilities in times of geopolitical trouble. Overseas markets sold off on the news of Israel's attack, including a nearly 3% decline for Japan's Nikkei and a 1% decline for Hong Kong's Hang Seng.

Mega-cap tech stocks, which often help set direction for U.S markets, were mixed but trended slightly lower ahead of the opening bell. This followed an unfavorable response to earnings from Netflix (NFLX) late Thursday that sent NFLX shares down more than 5% in premarket trading.

Poet T.S. Eliot called April the "cruelest month," perhaps thinking ahead to the market's behavior recently. The last few days saw early gains in the S&P 500® index (SPX) slowly snuffed out over the course of the session, taking it closer to the 5,000 level it first pushed above earlier this year. One possible comfort for bulls is that 5,000 hasn't been broken on tests the last two sessions. But failed rallies each day and today's soft open suggest little buying interest as investors warily watch the Middle East and rate cut hopes ebb.

The latest data blow came Thursday when the prices paid metric of the Philadelphia Fed's April Manufacturing Business Outlook Survey exceeded expectations. This kept inflation worries on the front burner and helped lift Treasury yields. The rally in yields—muted today by the attack on Iran but still near five-month highs—could be one factor weighing on growth stocks, including semiconductors and the broader tech sector. If the SPX declines again today, it would be the first six-day losing streak since late September 2022.

Futures based on the SPX were up less than 0.1% shortly before the close of overnight trading and futures based on the Nasdaq-100® (NDX) fell 0.03%. Futures based on the Dow Jones Industrial Average® ($DJI) climbed 0.06%.

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Morning rush

  • The 10-year U.S. Treasury yield (TNX) slid four basis points to 4.6%.
  • The U.S. Dollar Index ($DXY) was steady near five-month highs at 106.07.
  • The VIX recently traded at 18.8 after spiking to a six-month high of 21.36 earlier.
  • WTI Crude Oil (/CL) traded at $81.63 per barrel, down slightly and far off overnight highs above $86.
  • Bitcoin (BTC) rose 2.5% to just under $65,000.

Stocks in spotlight

The last time Netflix blew away estimates with its earnings in late January, it provided a breezy tailwind for the entire market in the middle of a 10% SPX rally to start the year.

Netflix results late Thursday again surpassed expectations with 16% subscribership growth, but it's a very different market now. Instead of rewarding Netflix for the beat, investors sold shares in premarket trading following a five-day losing streak for the SPX that's the longest since October. The index is now down nearly 5% from late-March highs and the 10% first-quarter rally has been roughly cut in half over just the last three weeks.

Netflix results looked robust from a headline perspective. Earnings per share (EPS) easily beat the average Wall Street estimate, and revenue also topped analysts' expectations, but not as dramatically. The company issued better-than-expected Q2 EPS guidance but forecast Q2 revenues below consensus views, which might have hurt shares. However, for the full year it sees revenue growth in line with Wall Street's expectations.

The oddball aspect of the report, and debatably what hurt shares, is Netflix's announcement that starting next year it will stop reporting quarterly membership numbers, which management says are just one aspect of quarterly health among others like advertising and different customer tiers. This could remind investors of when Apple (AAPL) in 2018 said it would stop reporting how many iPhones it sold each quarter.

Subscriber gains in Q1 were well above the company's and Wall Street's forecasts, but the idea that this metric will vanish next year suggested to some analysts that Netflix may not be as bullish about future subscriber growth. The company continues to make strides in ads membership, growing it 65% quarter-on-quarter.

Tech dominates: Next week is the big one for tech as Meta Platforms (META), Alphabet (GOOGL), and Microsoft (MSFT) report. Analysts have lofty expectations for EPS and revenue growth at all three, with AI likely driving gains to some extent but cost-cutting another factor. Multiples for most of the mega caps galloped higher in Q1.

"The question heading into mega-cap tech earnings is where do investor expectations stand in regard to growth given the recent run-up in price," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. "Even in a beat/raise scenario, expectations determine whether or not the results justify a higher share price."

Semiconductors return next week as part of the tech earnings barrage, with Intel (INTC) and Texas Instruments (TXN) reporting. This could give investors another chance to learn of Intel's progress bringing more chip manufacturing back to the United States.

Retail sales data and several other numbers from China earlier this week disappointed. Listen closely to tech firms for any possible sign of this weakness hurting U.S. company earnings.

Telecommunications also come online next week with the triple threat of earnings from Verizon (VZ), AT&T (T), and T-Mobile US (TMUS). As Barron's noted recently, competition is rising across the industry as T-Mobile US continues to offer lower prices, and Verizon has won market share from AT&T. 5G network quality is another factor that could drive customers from one carrier to another.


Stocks on the move:

  • American Express (AXP) fell nearly 1.3% in premarket trading despite earnings that generally matched or exceeded Wall Street's expectations. EPS was far ahead of the average analyst estimate and revenues were in line. The company also reaffirmed guidance and said overall card member spending grew 7% while U.S. consumer member spending grew 8% year over year. Expenses rose 3%, which might be one fly in the ointment.
  • Procter & Gamble (PG) shares slipped close to 1% following a quarterly revenue miss from the consumer product giant. PG beat the average analyst estimate on EPS and raised fiscal 2024 EPS guidance while reaffirming revenue guidance for the year. Revenue of $20.2 billion for the company's fiscal third quarter compared with the average FactSet forecast of $20.43 billion. Product volume has been in the spotlight for a while and stayed flat in Q3, with the company's 1% year over year revenue growth driven by higher prices. Improved volume, if and when it comes, would suggest customers filling their carts with more of PG's well-known household products.

What to watch

Inflation countdown resumes: After a week dominated by secondary numbers mostly related to housing, U.S. data picks up in coming days as investors brace for next Friday's March Personal Consumption Expenditures (PCE) prices report. That's the Fed's favorite inflation indicator and will come after hotter-than-expected Consumer Price Index (CPI) and Producer Price Index (PPI) reports already released for the month.

There's some hope that PCE could be milder, in part due to fluctuations in PPI and also because it's less shelter focused. There's no analyst consensus available yet, but February PCE and core PCE both rose 0.3%. Core strips out volatile food and energy prices.

Before PCE, investors get a glance Thursday at the government's first estimate for Q1 gross domestic product (GDP). Market estimates have been climbing for weeks based on robust economic data, playing into expectations that the Fed could wait longer to cut rates. The Atlanta Fed's GDPNow model now pegs GDP to grow at a seasonally adjusted annual rate of 2.9%, not much below the final Q4 reading of 3.4%.

Other U.S. reports to watch next week include durable goods and New Home Sales.

Another thing to keep an eye on next week is Asian markets, which suffered sharp losses this week in response to Chinese economic data and the Middle East conflict. European indexes also had a losing week.

Fed speakers have been so numerous lately it led to someone on Wall Street coining the term, "Federal Open Mouth Committee" (a play on Federal Open Market Committee). They'll still be circulating early next week, but as the end of the week approaches so does the "quiet period" ahead of the Fed's April 30–May 1 meeting, removing one potential source of volatility.

Thursday in review:

The SPX and the Nasdaq Composite® ($COMP) fell for the fifth straight trading day and closed near two-month lows as slumping semiconductor shares pulled the technology sector down and deflated hopes for interest rate cuts from the Federal Reserve continued to dampen investor enthusiasm. Taiwan Semiconductor Manufacturing (TSM) sank almost 5% despite the company's stronger-than-expected quarterly results. Weakness in chipmaker shares pushed the PHLX Semiconductor Index (SOX) down 1.7% to a two-month low. Biotechnology and consumer discretionary shares also fell. 

Despite recent losses, major indexes remain close to recent all-time highs and the U.S. economy appears strong by many measures.

"Our sector ratings continue to favor segments of the market that benefit when the economy is entering a recovery and moving into expansion—energy, financials, and materials are our 'outperforms,'" said Kevin Gordon, director, senior investment strategist, Schwab.

Eye on the Fed

Early today, futures traders saw 96% chances of rates remaining unchanged at the Federal Open Market Committee's (FOMC) April 30–May 1 meeting. Odds of a 25-basis point cut at the June meeting are around 17%, rising to roughly 42% for the late-July meeting, based on the CME FedWatch Tool. These probabilities aren't changed much from yesterday.

Bond basics: Brush up on your callable bonds knowledge with this helpful post by Collin Martin, director, fixed income strategist at Schwab.

Thinking cap

Ideas to mull as you trade or invest 

Beyond tech: Not every earnings report next week concerns data housed in the cloud or information speeding through 5G connections. There's also stuff that flows through pipelines, meaning get ready for energy industry earnings. Chevron (CVX), Exxon Mobil (XOM), and Phillips 66 (PSX) are among the names to watch. The energy sector is expected to report the largest year-over-year revenue decline of any sector at negative 5.5%, according to research firm FactSet. Lower revenue could hit both refining and production aspects of the industry despite climbing crude oil prices.

Tesla looms: You don't need the oil industry's products to drive a Tesla (TSLA), which reports Tuesday following a quarter most of the company's investors would likely rather forget. Shares dove another 3.5% yesterday, posting a new 52-week low, and are off nearly 40% so far this year. On earnings day, investors will likely want to know much more about where the company's stock value, product plans, and cost structure are heading as the EV space appears to be losing some of its luster. Tesla shares fell another 1% in premarket trading after the National Highway Traffic Safety Administration announced Tesla is recalling 3,878 Cybertrucks to fix an accelerator pad issue, Reuters reported.

Talking technicals: For technical support, the area near 5,000 in the SPX that represents a 5% pullback from this year's all-time closing high and could be a place to watch, along with the old all-time high near 4,800. The SPX hit a low of just below 5,002 intraday Thursday, and barely found buying interest there. However, selling didn't pick up on that downward move. A drop below 5,000, if it happens intraday today, could be interesting to watch for signs of follow-through technical selling.

Calendar

April 19: Expected earnings from American Express (AXP), SLB (SLB), and Procter & Gamble (PG).

April 22: Expected earnings from Verizon (VZ) and Nucor (NUE).

April 23: March New Home Sales and expected earnings from Freeport-McMoRan (FCX), Halliburton (HAL), Lockheed Martin (LMT), Kimberly-Clark (KMB), PepsiCo (PEP), Philip Morris (PM), Tesla (TSLA), Texas Instruments (TXN), and Visa (V).

April 24: March durable goods orders, and expected earnings from Meta Platforms (META), AT&T (T), Ford (F), Boeing (BA), IBM (IBM), Humana (HUM), and Waste Management (WM).

April 26: March PCE Prices and March core PCE Prices, March Personal Income and Personal Spending, final University of Michigan April Consumer Sentiment, and expected earnings from AbbVie (ABBV), Chevron (CVX), Exxon Mobil (XOM), and Aon (AON).

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