Stocks rallied, holding on to earlier gains as traders hang on to hope that the bottom has been set, a courageous strategy. The housing market, hot yesterday, is not hot today.
Some adjustments. Inflation, the Fed, and the potential for recession are still important issues. Adding to those is individual company performance, which will play out over the next several weeks in Q3 earnings season. No new news on the Fed, though the rhetoric continues to ramp up. Neel Kashkari, who would be characterized as being historically dovish, logged his most hawkish comments to date yesterday, stating that he doesn’t see the Fed slowing down on rate hiking, even beyond 4.75%, until the Core CPI shows signs of normalizing. For the record, markets expect Fed Funds to get to those nosebleed levels by March of ‘23 after two big hikes and possibly a smaller one… but we will certainly get there, according to futures and Mr. Kashkari. The Fed policymaker also admitted that he did not believe that we are in a recession. While he may be correct about that… for the moment… more and more economists are predicting a recession within the next year, as the probability rose to 60% (according to a group of top economists) a few days back. Each Fed member is entitled to his or her own positions, but collectively the message is clear, inflation-fighting rate hikes are far from over.
In the past few sessions, markets appear to have fully accepted all the troublesome, not-so-new news just mentioned. That could certainly be true, but does that mean that the selling is over? Predicting that would be a fool’s bet at this point considering that earnings season has just got underway. This earnings season will be an interesting one. In most earnings seasons, we are all accustomed to seeing headlines that this company beat and the other missed. Though those headlines are important, they typically only play a small part in determining a stock’s performance beyond the announcement. We look closely at changes in guidance and management transcripts for hints of trouble ahead, something I cover quite closely in these notes. What is different this time around? In terms of guidance, companies have been very careful to prevent devastating surprises. Knowing that markets are already expecting “challenges” in the year ahead, CEOs have been given a pass to set a low bar… and they have certainly used that pass. Analysts, who turn that guidance in numbers, having gotten some religion year to date, have also erred on the side of conservatism, lowering targets in the months leading up to earnings season. Makes sense in a market like this, right? So, what does that mean for us? Well, if a company beats estimates, it is possible that the markets may not be so impressed, knowing that bar has been set so low. I too, have impressed the younger versions of my kids by stuffing a basketball in a net lowered to 5 feet from the regulation 10 feet! I miss those days.
Stocks have already factored in the worst-case scenario at this point, factoring in not only weaker forward guidance, but also low expectations on the economy, persistent inflation, and general, negative market sentiment. It is, therefore, unlikely that an earnings miss will go unnoticed… or unpunished. If guidance is lowered further or earnings are missed, expect stocks to reprice the adjustments, adding more discomfort to the existing pain. The bottom line here is that misses will likely receive punishment and possibly a mere “meh” for beats. This will certainly add to the confusion… and the volatility in the coming weeks. What might prove helpful is that the Fed will enter a blackout period starting this weekend ahead of its November 2nd FOMC meeting, leaving Fed members only 3 more trading days to log their mostly ghoulish, Halloween wishes.
WHAT’S SHAKIN’
Netflix Inc (NFLX) shares are higher by +13% in the premarket after it announced that it beat EPS and Revenue targets. The company announced that it added +2.41 million new subscribers, greater than the expected +1 million additions. The news was well received by shareholders and analysts who were expecting the worst. The gains triggered several high-profile analyst upgrades. Potential average analyst target upside: +15.8%.
Generac Holdings Inc (GNRC) shares tumbled by -16.76% in the premarket after slashing its full-year guidance ahead of its earnings announcement scheduled for 11/2. Potential average analyst target upside: +102.3%.
Intuitive Surgical Inc (ISRG) is trading higher by +10.3% in the premarket after the company announced that it beat EPS and Revenue estimates by +6.75% and +2.28% respectively. The company further raised its forecast for total procedures growth for the year. The beat resulted in some analysts raising 12-month price targets. Potential average analyst target upside: +29.2%.
The Proctor & Gamble Co (PG) shares are higher by +1.82% after the company announced that it beat EPS and Revenue estimates by +1.48% and +1.34% respectively. Dividend yield: 2.84%. Potential average analyst target upside: +14.1%.
Also, this morning: Elevance Health (ELV), Citizens Financial(CFG), and Nasdaq (NDAQ) beat on both EPS and Revenues while Lithia (LAD) and Baker Hughes (BKR) came up short.
YESTERDAY’S MARKETS
Stocks rallied yesterday on continued hopes that stocks have seen their worst. The S&P500 rose by +1.14%, the Dow Jones Industrial Average climbed by +1.12%, the Nasdaq Composite Index gained +0.90%, and the Russell 2000 Index advanced by +1.19%. Bonds gained and 10-year Treasury Note yields slipped by -1 basis point to 4%. Cryptos declined by -1.59% and Bitcoin lost -0.83%.
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