Tesla's Weak Quarter Sets Soft Early Tone, with Recession Fears Spiking

Disappointing earnings from Tesla (NASDAQ:TSLA) set the tone this morning, helping send major indexes lower overnight. Overall, the hot start to earnings season cooled over the last few days, though there have been some positive highlights.

Regional banks, for one, have looked relatively healthy despite last month’s industry crisis. Also, IBM (NYSE:IBM), D.R. Horton (DHI), Union Pacific (NYSE:UNP), and AT&T (T) all beat analysts’ earnings expectations. Shares of IBM rose 2% in premarket trading after the company reported margins were expanding.

It’s the opposite story at TSLA, where falling automotive margins in Q1 following the company’s vehicle price cuts sent several analysts scurrying to their desks to lower price targets on the stock. Shares of American Express (NYSE:AXP) also slumped early on following an earnings miss despite signs of strong spending by cardholders.

Treasury yields and crude both came under pressure early Thursday, which could reflect growing recession concerns. However, the benchmark 10-year Treasury note yield remains close to recent highs of 3.6%, and the rate-sensitive 2-year Treasury note yield is still well above 4% amid overwhelming market sentiment that the Federal Reserve will likely raise interest rates again in early May.

With the combination of recession fears and prospects of a rate hike prevalent, it’s been hard for major indexes to find much traction at current levels near 2023 highs. If mega-cap stocks like TSLA and Apple (NASDAQ:AAPL) slump, as both did this morning, that could make it even harder for the indexes to gain ground.

• The (10 Year Treasury Yield) fell 3 basis points to 3.56%.
• The U.S. Dollar Index ($DXY) eased slightly to 101.87.
• The Cboe Volatility Index® (VIX) futures bounced to 17.33 after hitting new 2023 lows yesterday.
• WTI Crude Oil (/CL) slipped to $77.99 per barrel, surrendering more of the premium it gained on OPEC’s cuts

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

The labor market showed more signs of slowing this morning as weekly jobless claims climbed to 245,000. That’s up from 240,000 the previous week and from below 200,000 through much of early 2023.

AAPL shares were in retreat ahead of the bell, possibly pressured by Taiwan Semiconductor’s (Taiwan Semiconductor Manufacturing (NYSE:TSM)) softer-than-expected guidance. While TSM doesn’t publicly state which companies buy its chips, analysts following the sector believe AAPL is an important customer, so any softness at TSM could be interpreted a possible sign of weaker demand from AAPL.

TSM’s outlook appeared to hurt semiconductor stocks in general in premarket trading. Most fell, implying this could be a tough day for the Nasdaq 100® (NDX).

The probability of a 25-basis-point increase next month was steady at 87% this morning, according to the CME FedWatch Tool.

If you’re wondering why Fed speakers continue to pound the inflation table despite the cooler price gains in recent economic reports, it helps to look more closely at the data. “There has been a lot of cheering over the disinflation in headline inflation metrics, but core measures— which strip out volatile food and energy prices—are not easing nearly as fast,” notes Kevin Gordon, Schwab’s senior investment strategist.

On the more positive side from an inflation perspective, Wednesday’s Fed Beige Book Survey of recent developments in the U.S. economy describes consumer spending as “flat to down slightly.” It adds that lending volumes and loan demand are declining across both business and consumer-type loans. Several Fed districts note that banks tightened lending standards amid increased uncertainty and “concerns about liquidity,” the Beige Book says. It also observes moderating growth in employment, which might come as a relief to a Fed concerned that tightness in the job market could extend price pressure.

Although the Fed might go quiet soon, company earnings reports will make some noise. The next two weeks feature the biggest lump in the snake, with hundreds of S&P 500® companies ready to report. Big tech comes into play next week with Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), and Amazon (NASDAQ:AMZN). So does social media as Meta (META) will post next Wednesday. Healthcare companies are also well represented on next week’s calendar.

Investors began the day digesting yesterday’s Tesla (TSLA) results, which came after the electric vehicle company lowered prices yet again.

Tesla unplugged: Shares of the electric vehicle maker plunged nearly 8% in premarket trading after TSLA released Q1 earnings late Wednesday. Though TSLA’s earnings per share and revenue results were near Wall Street analysts’ expectations, the selling may relate to TSLA’s sharply lower profit margins after the company lowered prices several times in Q1.

TSLA’s automotive gross margin for the quarter fell to less than 16%, excluding regulatory credits, from around 24% in Q4 2022. Gross profit margin per vehicle sold fell to approximately $6,800, from around $15,700 a year earlier. As Barron’s notes, lower prices pressure profitability. The concern isn’t so much about Q1 earnings, but rather what lower margins might mean down the road. There was recent chatter on Wall Street that TSLA made progress reducing its production costs, which conceivably could help margins even with lower prices. That remains to be seen.

Next up: Key earnings to watch later today and early tomorrow include railway CSX (NASDAQ:CSX), gold and copper company Freeport-McMoran (FCX), and consumer products giant Procter & Gamble (PG). The sharp rise to near-record gold prices over the last two months helped lift FCX shares, but keep in mind that copper futures (/HG) have been relatively flat lately, kept on a leash by investor worries of a recession and its possible effect on demand.

Get ready: March Existing Home Sales are due out soon after today’s open, and one question is whether median prices will fall again as they did in February for the first time in 11 years. Analysts expect a slight decline in the headline figure to a seasonally adjusted 4.5 million in March, according to consensus from Briefing.com.

Under the hood: Leading Economic Indicators from the Conference Board also come out this morning shortly after the opening bell, and Wall Street expects another decline—this time of 0.4%. The LEI can offer investors and traders a potentially advance warning signal on recessions, because historically the LEI has turned down before the economy followed suit. The LEI isn’t a holy grail, however. There have been times when it has declined without a subsequent recession.

Speed governor: The S&P 500® index (SPX) just can’t find much traction above 4,150. It’s closed just above that several times in recent days, but buying interest seems to ebb at that level. This could reflect valuation concerns, considering the SPX has a price-earnings ratio that’s above historic norms even as analysts predict a year-over-year earnings decline. It also suggests buyer caution with the SPX closing in on 2023 highs near 4,170.