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TSLA  and  NFLX’S Reports Were Viewed as Disappointing

Markets were bifurcated yesterday as both TSLA and NFLX profit reports were disappointing.  The NASDAQ dropped about 2.3% and the Dow was up about 0.5%.  Markets were also spooked by rising interest rates.

As widely noted, the vast majority of the year-to-date advance is focused in the seven mega sized technology companies, an advance predicated upon falling interest rates and rising profits.  However, neither of the two tenants are materializing.

Volumes have been written about monetary policy where the overnight is expected to be raised again next week.  Yesterday’s economic data supported the possibility of two more rate increases by year’s end.

Bloomberg writes profits for the tech companies in the S & P 500 are projected to decline 5% in the quarter, returning to profit growth in the final quarter of the year. 

And then there are valuations and price targets which are extremely stretched.

For example, according to Bloomberg, MSFT has been above the average target price since 2020, though Wednesday the premium hit its highest since 2013.  Much of the 2023 rally reflects excitement over AI.

Any disappointments in results or forward-looking statements could result in rising volatility.  As noted, TSLA—one of the seven companies that have boosted the NASDAQ 100 by 43% YTD—missed sending shares lower by 9.8%.  NFLX—albeit not one of the famed seven—also missed and shares cascaded 8.5% lower.

Next week MSFT, AMZN and GOOG all post results.  If any of these companies miss, volatility may further rise.

Also weighing on the markets is talks of a worsening of the conflict in Ukraine, which may result in higher oil and food prices, which could further increase inflationary pressures. 

What will happen today?  Not only is today options expiration day where $2.4 trillion of options tied to stocks and indexes are scheduled to mature, it is also the day of an out of cycle rebalance in the NASDAQ 100.

As noted two weeks ago, NASDAQ is rebalancing the NASDAQ 100 to lower the weighting of the six largest companies in this benchmark from a recent peak of 54.1% to 40% of total capitalization.  The six companies are MSFT, AAPL, GOOG, NVDA, AMZN and TSLA.

Will this rebalancing or option expiration day be a factor?

Last night the foreign markets were mixed.  London was up 0.09%, Paris up 0.29% and Frankfurt down 0.41%.  China was down 0.06%, Japan down 0.57% and Hang Seng up 0.78%. Dow and NASDAQ futures are flat and up 0.3%, respectively.   The 10-year is up 4/32 to yield 3.84%.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.