Broader Market Falls on Disappointing Tech Earnings from Tesla and Netflix

What you need to know…

The S&P 500 Index ($SPX) (SPY) Thursday closed down -0.68%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.47%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -2.28%.

Stocks settled mostly lower Thursday, although the Dow Jones Industrials bucked the trend and climbed to a 15-month high.  A slump in Netflix and Tesla Thursday weighed on technology stocks and the broader market.  Netflix fell more than -8% after projecting weaker-than-expected Q3 revenue, and Tesla dropped more than -9% after reporting lower-than-expected Q3 gross margins. A jump in bond yields Thursday also weighed on stocks on signs of U.S. labor market strength after weekly jobless claims unexpectedly fell to a 2-month low.

By contrast, better-than-expected quarterly earnings results from Johnson & Johnson and International Business Machines pushed the Dow Jones Industrials higher.

U.S. weekly initial unemployment claims unexpectedly fell -9,000 to a 2-month low of 228,000, showing a stronger labor market than expectations of an increase to 240,000.

The U.S. July Philadelphia Fed business outlook survey rose +0.2 to -13.5, weaker than expectations of -10.0.

U.S. June existing home sales fell -3.3% m/m to a 5-month low of 4.16 million, weaker than expectations of 4.20 million.

U.S. June leading indicators fell-0.7% m/m, weaker than expectations of -0.6% m/m.

The markets are discounting the odds at 96% for a +25 bp rate hike at the next FOMC meeting on July 25-26.  The markets are anticipating a peak funds rate of 5.42% by November, which is +34 bp higher than the current effective federal funds rate of 5.08%.

Global bond yields Thursday moved higher.  The 10-year T-note yield rose +10.4 bp to 3.852%.  The 10-year German bund yield rose +5.2 bp to 2.490%.  The 10-year U.K. Gilt yield rose +6.3 bp to 4.277%. 

Overseas stock markets Thursday settled mixed.  The Euro Stoxx 50 closed up +0.26%.  China’s Shanghai Composite Index today closed down -0.92%.  Japan’s Nikkei Stock Index closed down -1.23%.

Today’s stock movers…

Discover Financial Services (DFS) closed down more than -15% to lead losers in the S&P 500 after it said it would suspend share buybacks and that it was in discussion with regulators over how it misclassified some of its credit cards. 

Tesla (TSLA) closed down more than -9% to lead losers in the Nasdaq 100 after reporting Q3 gross margins of 18.2%, below the consensus of 18.8%, and forecast full-year vehicle production of 1.80 million vehicles, below the consensus of 1.88 million.

Netflix (NFLX) closed down more than -8% after reporting Q2 revenue of $8.19 billion, weaker than the consensus of $8.30 billion and forecast Q3 revenue of $8.50 billion, below the consensus of $8.67 billion. 

Equifax (EFX) closed down more than -8% after reporting Q2 operating revenue of $1.32 billion, below the consensus of $1.33 billion, and forecast Q3 revenue of $1.32 billion-$1.34 billion, weaker than the consensus of $1.35 billion.

Intel (INTC) closed down more than -3% to lead losers in the Dow Jones Industrials after Wolfe Research initiated coverage on the stock with a recommendation of underperform and a price target of $27.

Semiconductor stocks were under pressure Thursday after Taiwan Semiconductor Manufacturing Co, the world’s largest contract chipmaker, cut its full-year revenue outlook and projected a 10% fall in sales this year, versus previous guidance for a single-digit decline.  As a result, Applied Materials (AMAT), Advanced Micro Devices (AMD), and ASML Holding NV (ASML) closed down more than -5%.  Also, KLA Corp (KLAC) and ON Semiconductor (ON) closed down more than -4%.  In addition, Globalfoundries (GFS), Microchip Technology (MCHP), Lam Research (LRCX), and NXP Semiconductors NV (NXPI) closed down more than -3%. 

Genuine Parts (GPC) closed down more than -7% after reporting Q2 net sales of $5.92 billion, weaker than the consensus of $5.93 billion.

Crown Castle (CCI) closed down more than -5% after cutting its full-year FFO estimate to $3.30 billion-$3.33 billion from a previous estimate of $3.35 billion-$3.40 billion, below the consensus of $3.36 billion. 

Zions Bancorp (ZION) closed up more than +9% to lead gainers in the S&P 500 after reporting Q2 total deposits of $74.32 billion, well above the consensus of $68.49 billion.

Johnson & Johnson (JNJ) closed up more than +6% to lead gainers in the Dow Jones Industrials after reporting Q2 sales of $25.53 billion, better than the consensus of $24.67 billion, and raising its full-year sales forecast to $98.9 billion-$99.8 billion from a prior view of $97.9 billion-$98.9 billion. 

Abbott Laboratories (ABT) closed up more than +4% after reporting Q2 net sales of $10.0 billion, better than the consensus of $9.73 billion.

United Airlines Holdings (UAL) closed up more than +3% after reporting Q2 adjusted EPS of $5.03, better than the consensus of $3.99, and raised its full-year adjusted EPS forecast to $11-$12 from $10-$12, stronger than the consensus of $9.80.

Catalent (CTLT) closed up more than +2% after Bloomberg News reported that Elliot Investment Management had built a significant stake in the company and is pushing for changes to the company’s board of directors.

International Business Machines (IBM) closed up more than +2% after forecasting full-year revenue up +3% to +5%, better than the consensus of +2.89%.

Across the markets…

September 10-year T-notes (ZNU23) Thursday closed down -27.5 ticks, and the 10-year T-note yield rose +10.4 bp to 3.852%.  Sep T-notes Thursday dropped to a 1-week low, and the 10-year T-note yield climbed to a 1-week high of 3.870%.  An unexpected drop in U.S. weekly jobless claims to a 2-month low is a hawkish factor for Fed policy and weighed on T-note prices.  Also, an increase in inflation expectations undercut T-notes after the 10-year breakeven inflation rate jumped to a 3-month high Thursday at 2.319%.

Weaker-than-expected U.S. economic news Thursday supported T-notes after Jun existing home sales fell more than expected to a 5-month low and after the Jul Philadelphia Fed business outlook survey rose less than expected.  Also, weakness in stocks Thursday fueled some safe-haven demand for T-notes. 

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