Netflix weighs down Nasdaq, S&P 500, but Dow Industrials swim upstream

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NETFLIX WEIGHS DOWN NASDAQ, S&P 500, BUT DOW INDUSTRIALS SWIM UPSTREAM (1605 EDT/2005 GMT)

The tech-heavy Nasdaq declined on Wednesday as streaming giant Netflix’s first drop in subscribers in a decade , pushed investors to dump other high-growth companies which may face similar post-pandemic performance issues.

Indeed, NFLX was the biggest drag on both the Nasdaq and the S&P 500. The Dow, however, even though also weighed down by another streaming giant, Disney , relied on IBM to more than compensate , and help drive the blue-chip average to a gain on the day.

A majority of major S&P 500 sectors ended higher. Value outperformed growth, and transports posted a more than 1.5% rise.

Meanwhile, the latest data point on the Federal Reserve’s monetary policy tightening plans, its “Beige Book”, showed the U.S. economy expanded at a moderate pace from February through early April and there was little respite for businesses from high inflation and worker shortages.

The U.S. 10-Year Treasury yield, nearly tagged 3% earlier on Wednesday, with a 2.9810% high. It then reversed, and is now in the 2.84% area.

Here is Wednesday’s closing snapshot:

(Terence Gabriel)

U.S. SALES GROWTH STILL ON TRACK TO OUTPACE PROFIT GAINS (1305 EDT/1705 GMT)

While it’s still early in the reporting season, revenue growth for S&P 500 companies in the first quarter is estimated at 11%, above the 6.5% growth seen for earnings in the quarter, according to IBES data from Refinitiv as of Wednesday.

Both revenue and earnings growth are expected to have slowed from the fourth quarter and most of last year, when corporate results had a big jump from the pandemic lows.

While stronger sales are a positive for quarterly results, investors have been worried about higher wages, commodities and other costs cutting into profit margins.

The 11% estimated revenue growth rate is up slightly from 10.9% at the start of April, based on results from 60 companies and estimates for the rest of the S&P 500.

About 67% of the reports are beating Wall Street revenue expectations, based on Refinitiv’s data. That compares with an average 62% of companies beating estimates for a full quarter since 2002 and 80% over the past four quarters.

(Caroline Valetkevitch)

NETFLIX, THE FAANG GROUP’S ‘ONE-TRICK PONY'(1214 EDT/1614 GMT)

Pandemic-darling Netflix Inc has bled $52 billion in market cap as of noon EDT, and is likely to confirm its position as the worst performing S&P 500 stock year-to-date.

The world’s largest streaming provider’s misfortunes are not boding well for other streaming companies such as Disney , Roku and even Facebook-owner Meta Platforms has taken a 5% hit.

The NYSE FANG+TM index – which includes the five core FAANG stocks – Meta Platforms, Apple, Amazon.com, Netflix and Alphabet – fell 4.2% to one-month low.

Investors, however, are skeptical over Netflix’s spillover on the mega-cap companies’ earnings.

“Netflix’s overall power, from a market cap perspective is continuing to diminish,” said Chris Osmond, chief investment officer at Centura Wealth Advisory in San Diego.

“Larger FAANG stocks… have multi sources of revenue, and they aren’t so one dimensional. While Netflix is the largest streaming provider in the world, they’re kind of a one-trick pony.”

It also might take some time for Netflix to regain investor confidence.

“Netflix is going to be in the living dead for a while,” said Kim Forrest, chief investment officer at Bokeh Capital Partners, explaining that “value investors don’t trust it because it doesn’t have a big enough balance sheet to support it’s business for a very long time. And growth people don’t want it, and momentum people certainly don’t want it and that leaves the stock just kind of bumping around for a while.”

Ryan Detrick, chief market strategist at LPL Financial believes “this is a reminder for investors to have some value exposure.”

(Medha Singh, Sruthi Shankar)

THE HOUSE THAT COVID BUILT: HOME SALES DROP, MORTGAGE RATES SCALE 12-YEAR HEIGHTS (1045 EDT/1445 GMT)

Rising interest rates on home loans and still-white-hot home price growth are rendering the pandemic-driven housing market boom architecturally unsound.

Recent housing indicators all point in that direction: homebuilder sentiment, housing starts, building permits.

And now, sales of previously owned U.S. homes fell by 2.7% in March to 5.77 million units at a seasonally adjusted annualized rate (SAAR), according to the National Association of Realtors (NAR).

That’s lower than the 5.80 million units SAAR that analysts expected, and extends February’s worse-than-previously-reported 8.6% plunge.

Existing home sales, which account for the lion’s share of total U.S. home sales, are down 4.5% from March of last year.

The sector is increasingly groaning under the weight of its COVID-era success, which saw potential buyers making a mad dash for the suburbs in search of elbow room and office space. This drove prices through the roof and inventories to record lows.

Speaking of which, inventories crept higher on the waning demand. It would now take 1.9 months to sell all the houses on the market at the current rate, up from 1.7 in February.

“The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation taking a hit on purchasing power,” writes Lawrence Yun, chief economist at NAR.

Still, as seen in the graphic below, existing home sales are still above their February 2020 level, the month before the global health crisis brought the economy to its knees:

To add insult to injury, interest rates on home loans continue to creep ever-higher, tossing cold water on mortgage demand, according to the Mortgage Bankers Association (MBA).

The average 30-year fixed contract rate added 7 basis points to 5.20% last week, a twelve-year high.

Demand for loans to purchase homes consequently edged down 3.0% while refi applications took a steeper 7.7% dive, resulting in a net 5.0% overall drop in mortgage demand.

“The recent surge in mortgage rates has shut most borrowers out of rate/term refinances, causing the refinance index to fall for the sixth consecutive week,” says Joel Kan, associate vice president of Economic and Industry Forecasting at MBA. “In a housing market facing affordability challenges and low inventory, higher rates are causing a pullback or delay in home purchase demand as well.”

Total mortgage applications are down 48.4% from the same week a year ago:

So what lies ahead for the house that COVID built? For that, we look to housing stocks.

While the Philadelphia SE Housing index and the S&P 500 Homebuilding index easily outperformed the broader market in the first months of the pandemic, that relationship has since reversed (although the discrepancy has noticeably narrowed in recent sessions):

Wall Street is mixed by mid-morning trading.

The S&P 500 and the Dow are enjoying a second-consecutive rally day, while plunging Netflix shares, along with dips in Amazon.com and Tesla , are dragging the Nasdaq into the red.

(Stephen Culp)

NETFLIX: MISPRICED ASSETS CAN BE A HOUSE OF CARDS (1015 EDT/1415 GMT)

For years, some market watchers have been highlighting examples of the what they call the “market’s broken pricing mechanism.”

Netflix, is one example that Mike O’Rourke, chief market strategist at JonesTrading, has been frequently putting in this category. Why Netflix?

“Because two years ago, management unambiguously declared the environment for subscription growth was as good as it gets.”

O’Rourke adds that the company’s subsequent earnings reports generally reinforced that outlook. Following the April 2020 earnings report, he notes that Netflix shares gained approximately 60% hitting their all-time high this past November.

Now, “we are full circle almost two years to the day of that pivotal earnings release” and Netflix shares are trading down around $135, or nearly 40% after releasing its earnings after the bell on Tuesday.

The shares are down around 70% from that all time high registered just 5 short months ago, erasing around $200 billion in market capitalization.

As O’Rourke sees it, “the selling is not a new market revelation. It is the reckoning of an asset that has been mispriced for a minimum of two years due to that broken pricing mechanism.”

According to O’Rourke, although the negative outlook for the company seems obvious, one could not bet against the broken pricing mechanism (as evidenced by the recent new all time highs). He adds that even an FT story earlier this week about record U.K. subscription cancellations appeared to fall on deaf ears.

“The key thing investors today should fear is that Netflix was not the only mispriced asset in this market and when reconciliation comes, it will similarly be correcting multiple years of mispricing.”

Here is a monthly chart of NFLX price action:

(Terence Gabriel)

U.S. STOCKS HEADED FOR SECOND STRAIGHT RALLY AHEAD OF HOME SALES DATA (0942 EDT/1342 GMT)

Wall Street started the session primed for its second straight rally as earnings season gathered steam and interest rates press pause.

Benchmark Treasury yields took a breather on their uphill march, providing some relief to equities.

Existing home sales data is expected to hit at the top of the hour, which analysts expect to have fallen 3.7% last month. This, on the heels of the Mortgage Bankers Association reporting home loan interest rates touched a twelve-year high last week.

Streaming services provider Netflix Inc, a perennial COVID darling, was suffering the hangover of yesterday’s after-the-bell earnings report, which showed the first drop in subscribers in over a decade. Its shares plunged more 30% out of the starting gate.

The stock was the heaviest weight on the Nasdaq.

Consumer products giant Procter & Gamble posted its strongest sales growth in at least 15 years and raised its full-year sales forecast. The stock was modestly higher in early trading.

Tesla and United Airlines are among the heavy hitters stepping up to bat with earnings reports after the closing bell.

As of Tuesday, 80% of the S&P 500 companies having reported thus far, have beaten consensus, according to Refinitiv.

Analyst currently expect aggregate year-on-year S&P 500 earnings growth of 6.4% for the quarter.

(Stephen Culp)

DOW INDUSTRIALS: PRIMED FOR A RUN? (0900 EDT/1300 GMT)

The Dow Jones Industrial Average has recently been trading in a contracting range. With this, one measure of volatility may have reached a level suggesting the blue-chip average is close to its next trend:

The DJI ended Tuesday down about 6% from its early January intraday peak at 36,953. This, in the wake of a more than 8% recovery off its late-February intraday low at 32,272.

Over the past 21 trading days, the DJI is essentially unchanged, posting a rise of just 0.5%.

Meanwhile, just last Wednesday, daily Bollinger Band (BB) width, a measure of historical volatility, fell to its lowest level since November 24 of last year. In so doing, it tested a support line from its early-September trough. So far, the measure has risen slightly off this support, suggesting the Dow may be in the early stages of resolving its recent range.

Low BB width readings do not in themselves predict direction, but they can highlight a market primed for much more spirited action, leading to a next trend.

From its last two daily BB width troughs, DJI breaks came to the downside, leading to 4%-5% slides over the next 4-9 trading days.

Therefore, traders are closely watching DJI action vs its 35,372 late-March high, and its 34,102 mid-April low. A break outside this range may trigger a sharp rise in the volatility measure.

If so, momentum may take over, which could either send the Dow sprinting back up to, and above, its early-January peak, or stumbling down to, and below, its late-February trough.

(Terence Gabriel)

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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)