Last month, we asked: “Did regulators cool off the tech rally?” Well, as April comes to a close, the stock markets have just touched correction territory and bounced back. The expectation for interest rate cuts has been pushed back all the way until December 2024. What this means is that the wave of bullishness that has pushed this market higher since last October has now been delayed almost into next year.
What Led to the Current Rally?
Let’s review the underlying reasons for the movement in the market since October. First, the Federal Reserve indicated that it might cut interest rates 2 to 3 times during 2024; however, they have now backed away from that expectation due to continued inflation and now apparent weakness in the overall economy. This latest development puts the Federal Reserve in a difficult position. Stagflation is a tough problem to overcome. The latest economic statistics showed that GDP was growing at a slower pace than expected, combined with inflation at 3.2 percent, still well above the Federal Reserve’s 2 percent target.
Another factor that drove the market higher was the hype surrounding the benefits in productivity due to AI (artificial intelligence). Nvidia, ($NVDA), the benchmark of the AI sector, is now in correction territory as well (over 10 percent off its high).
Sour Apple?
Other key companies, such as Apple ($AAPL), are also struggling for various reasons. In the case of Apple, a combination of new regulations, legal problems, and a lack of exciting new products hinders the upward momentum of the stock. Apple is set to declare earnings on May 2, and traders and investors will be watching these results closely because “as goes Apple, so goes the market.” Apple makes up a significant percentage of most major indexes.
The Overall Picture for the Earnings Season
Please be sure to check out our Earnings Season DAS Newsroom review here.
So far, most companies have beaten earnings this season, but that has not been what has driven markets down. Current earnings seem to be fine, but the problem overall is with forward guidance. Companies are lowering their expectations as the Federal Reserve backs away from the expectation for lower interest rates in 2024. Interest rates will remain at current levels for the rest of this year, and this impacts companies’ cost of capital. In some instances, such as Tesla ($TSLA), we have seen previous bright spots in the economy, such as EVs, go dark. Tesla actually announced a reduction of its workforce by 10%, indicating that layoffs might be in the future as well.
In the case of Tesla, they even had to promise that more affordable electric vehicles would be ready for production by 2025. What this says about the overall economy is that the consumer is softening if they are looking for more affordable EVs; the current demand for EVs at the prices are satisfied. Tesla’s revenue dropped by 9% this quarter, a clear sign that anyone who wanted one has bought one at the current prices. The layoffs confirm the problem of oversupply as the factory lays off workers that are not needed to make new cars, as there are plenty of cars still waiting to be sold sitting in showrooms.
Next month, we will cover “the sell in May and go away trend”. Remember, in trading and investing it is always best to be careful to lock in profits and hedge positions after a significant move like we had from October 2023 until now.
Written by Michael DiGioia, Director of Education
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