US Stocks Unfazed by Fed Hawkishness

The US stock market saw little movement on Tuesday, May 7, with the Dow Jones (USA 30) and S&P 500 gaining 0.1% and the Nasdaq (US-TECH 100) down 0.1%.

Gains in the two indices came even despite prices dropping on the back of hawkish comments by Neel Kashkari. The Fed Minneapolis President said the Fed may need to keep interest rates elevated for an "extended period" as inflation appears to be settling closer to 3% rather than 2%. Back in March, Kashkari believed the Fed would cut rates twice in 2024.

Aside from rhetoric on the policy front, the indices seemed undeterred by Disney's (DIS) disappointing earnings, particularly the Dow Jones and S&P 500.  This suggests that the market is still holding out strongly amid a generally positive earnings season, even as elevated interest rates and high-flying expectations raise the bar for what can keep markets stable.

In fact, companies in the S&P 500 reported a 5% year-over-year (YOY) growth in earnings per share (EPS) for the first quarter, higher than analysts' initial forecasts of 3.2% growth. Analysts have also remained surprisingly optimistic about current quarter earnings, raising EPS projections by 0.7% so far in the second quarter compared to a usual decline of 1.8% over the past 20 years. However, earnings growth has been concentrated in a handful of large tech companies so far.

Lyft's Upbeat Earnings Amidst Automotive, Aerospace Struggles

Off the earrings reported on Tuesday, Lyft (LYFT) reported positive free cash flow (FCF) for the second consecutive quarter following a jump in rides (12%) and active riders (23%). The company reported a smaller net loss of $31.5 million compared to a loss of $187.6 million in the same quarter last year, with revenue nearly tripling by advertising customers Comcast (CMCSA), Zillow (Z) and Mastercard (MA).

Although the vehicle company delivered solid results, Rivian (RIVN) must sell all its vehicles to meet its production guidance for 2024. However, selling expensive electric vehicles (EVs) has been challenging for companies like Lucid (LCID). Rivian reported weaker-than-expected first-quarter earnings with an EPS loss of $1.48 compared to analyst estimates of $1.15 and an EBITDA loss of $798 million versus estimates of $843 million.

Nikola (NKLA) also reported a loss of $0.11 per share in Q1 2024 from revenue of $7.5 million, missing analyst estimates of a $0.10 loss on revenue of $15.8 million. The company delivered just 40 fuel-cell electric vehicles in Q1, compared to 31 battery-electric trucks in Q1 2023. 

Despite revenue and profits rising by double-digit percentages in the first quarter, Europe’s Ferrari (RACE) also came under pressure as shipments dropped significantly in China. The industry had such a bad day that even Tesla (TSLA) shares fell 3.8% after data showed its China-made EV sales fell 18% in April from a year earlier.

The aerospace industry was also marked red on Tuesday. Spirit AeroSystems (SPR) reported a wider-than-expected quarterly loss due to higher costs for Boeing (BA) in producing 737 MAX fuselages and charges related to its Airbus (AIR.DE) business. Boeing is seeking to acquire Spirit AeroSystems to improve production quality and prevent future incidents, but talks of a deal are yet to result in an agreement. Any deal would likely require Spirit's Airbus operation to be divested.  

UBS, UniCredit and Infineon Beat Expectations in Europe

Across the pond, UBS (UBSG.VX) reported a net profit after two successive losses, beating analyst expectations. Its shares climbed 7.6% in the aftermath of the positive results. Italian bank UniCredit (UCG-l) also reported earnings, with its shares rising around 3.6% higher. Moreover, the German semiconductor manufacturer Infineon (IFX.DE) cut its guidance due to prolonged demand weakness. However, its second-quarter sales beat expectations, sending its share price to over 12% higher.

Outlook Largely Depended on the Fed

Analysts expect broader earnings growth to pick up through the rest of 2024, which may support further market gains. They expect earnings to grow 9.6% in the second quarter YOY, with the current pace on track to nearly doubling estimates of 3.75% before the Q1 reporting season began. 

However, traders will still be looking to Fed officials' comments in addition to cues on where stocks may move next. Traders expect the Fed to cut rates by around 46 basis points by the end of 2024, with the first cut seen in September and another in December. Morgan Stanley (MS) also recently pushed their cut expectation back from July to September. 

As the Fed remains in wait-and-see mode until it gains more confidence that CPI inflation is moving sustainably back towards its 2% target, a policy change might indeed not take place until September. After all, Fed officials have signalled interest rates are unlikely to be cut in the near future and will remain at restrictive levels until they see clear signs of disinflation.  (Source: Barron's)

Conclusion

With a mix of positive earnings surprises and challenges in various sectors, including EV and aerospace, keeping an eye on upcoming earnings reports and Fed rhetoric may provide valuable insights for making well-informed trading decisions.