Tech earnings can still come to the stock market’s rescue but the early signs are far from encouraging.
Netflix,
Taiwan Semiconductor Manufacturing
Co.
and Dutch chip equipment maker
ASML
have done nothing to improve the mood with their earnings in recent days. TSMC, the world’s largest chip maker, cut its growth forecast for the broader semiconductor industry Thursday, putting the sector under more pressure. ASML, whose machines are essential for manufacturing chips, reported new orders that fell short of expectations Wednesday.
Netflix looks unlikely to play the role of savior as its revenue outlook disappointed investors despite strong subscriber growth. Its plan to stop reporting subscriber numbers, a metric popular on Wall Street, will not help with visibility.
So, the S&P 500 is currently on a five-day losing streak, its worst run since October last year. A sixth day of losses is a possibility, particularly amid rising tensions in the Middle East after Israel retaliated against Iran overnight, although early Friday there had yet to be official confirmation.
But there’s still hope for a tech-led market rebound. It lies with everybody’s favorite market catalyst—artificial intelligence. As badly as the market reacted to TSMC earnings, the company signaled strong demand for its AI chips. It’s non-AI semiconductors, such as for autos and smartphones, that are letting the side down.
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AI and whether it can offset struggles in other areas of the tech sector may come to define this earnings season and determine whether the rally restarts. Next week could be key as several of the biggest AI players post earnings, including Microsoft and Alphabet. Meta, which released a new version of its AI chatbot Thursday, will also release results.
Anything connected to AI seems to generate increasingly lofty expectations, which Big Tech must overcome to get the rally back on track.
—Callum Keown
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Stock Markets React After Israel Launches Iran Strike in Retaliation
Markets were reacting early Friday after Israel struck back at Iran, heightening tension in the Middle East. Israel aimed attacks at sites in central Iran where there is a drone factory, The Wall Street Journal reported, citing people familiar with the matter. While there haven’t been any public statements providing official confirmation, CNN reported that unnamed U.S. officials acknowledged the incident.
- Israel’s strike, in response to Iran’s drone and missile attack last weekend, targeted the area around Isfahan in central Iran, The Journal reported.
- Oil prices spiked above $90 a barrel first thing before pulling back as markets grappled with the aftermath of the retaliatory strikes against Iran. Brent crude futures, the international benchmark, had jumped 3% to $90.75 following initial reports of the attacks, later pulling back to a 1% rise. West Texas Intermediate had also risen 1.1% to $83.01 a barrel.
- Gold futures were little changed early Friday at $2397.10. That suggests traders aren’t turning to the yellow metal as a safe haven amid the deepening tensions. Gold prices are still up 1.5% over the past five days and 11% over the past month. U.S. stock futures fell and the U.S. dollar was little changed against a basket of currencies early in the day.
What’s Next: Much remained unclear about the extent or the impact of the Israeli action, The Journal reported. It added that the direct exchange of blows risks taking the conflict that began with militant group Hamas’s Oct. 7 attack on Israel to a dangerous new level. The worry is that it could embroil the U.S. and Gulf states in a regional conflagration that they have worked hard to prevent.
—Brian Swint, Callum Keown, Patrick O’Donnell, Rupert Steiner
***
Netflix Beats as Password-Sharing Crackdown Boosts Subscribers
Netflix
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reported better-than-expected financial results and strong subscriber growth for its first quarter, boosted by original content and a password-sharing crackdown. But the streaming provider warned that it would soon stop providing quarterly membership data and average revenue generated per-member, the data investors watch most closely.
- Netflix added 9.33 million net new subscribers in the quarter, more than five times the number added during the same quarter last year. Its global audience exceeds more than half a billion people, including 269.6 million paying customers, up 16% from last year.
- Revenue rose nearly 15% to $9.37 billion, and profit was $5.28 a share. Ad-based memberships increased 65%. Netflix said it won’t provide membership data because the figure has become less meaningful under its multiple plans at various pricing levels. It will announce major subscriber milestones.
- Co-CEO Greg Peters said Netflix wants to focus more on the key data that matter most, including operating income, EPS, margins, and free cash flow. Co-CEO Ted Sarandos said the approach better reflects the evolution of the business and how it manages internally.
- Original streaming content offered in the quarter included the science fiction show 3 Body Problem, the next season of reality show Love Is Blind, and the drama Griselda. It also debuted the film Damsel.
What’s Next: Netflix projects second-quarter revenue of $9.49 billion, up 16%, slightly below consensus, and better-than-consensus profit of $4.68 a share. Although it didn’t provide detailed subscriber guidance, it said net adds would be down from the first quarter because of seasonal factors.
—Eric J. Savitz and Janet H. Cho
***
Meta Platforms Raises Profile of Its AI Chatbot Efforts
Meta Platforms
is raising the profile of its artificial intelligence products, rolling out a free website version of its Meta AI chatbot upgraded with its latest large-language model and integrating the chatbot in the search functions of its social media apps Facebook, Messenger, Instagram, and WhatsApp.
- It is Meta’s answer to Google’s Gemini from
Alphabet
,OpenAI’s ChatGPT, and
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Microsoft
’sBing. In addition to natural language chat queries, Meta AI can create images and short animations. Meta said the updated version will produce images that are more consistent with user intent.
- The new chatbot is powered by Meta’s Llama 3, its updated open-source large-language model, in 8 billion or 70 billion parameter versions. It first rolled out Meta AI in the U.S. last year but is now expanding an English-language version to more than a dozen countries. It will eventually be multilingual.
- Although Meta AI is free to use, people who log in with their Facebook IDs will have their queries stored in memory, making it easier to pick up on explorations started in previous sessions. The company said it doesn’t plan to sell ads or require subscriptions for the site.
- Wedbush analyst Dan Ives said the AI revolution has begun to hit its next gear of growth focused on software after starting with chip makers. He said AI-related outlays will be 8% to 10% of 2024 information technology budgets, up from less than 1% in 2023.
What’s Next: Connor Hayes, vice president of product for Generative AI, told Barron’s that Meta has partnerships with both Google and Bing to handle real-time queries through Meta AI on the stand-alone services and inside the company’s apps, for questions such as live sports scores and stock quotes.
—Janet H. Cho and Eric J. Savitz
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Fed Officials Deliver Message that Patience is a Virtue
More Federal Reserve officials are delivering the message that there’s no rush to move on interest rates, joining those who don’t see a rate cut until later this year. New York Fed President John Williams and Atlanta Fed President Raphael Bostic indicated they were comfortable being patient.
- Williams said during a conference sponsored by Semafor that the current rate is at a good place and he doesn’t feel the urgency, especially as inflation continues to run higher than their target 2% rate. He added that policy is “doing exactly what we’d like to see.”
- Recent economic data have shown a strong labor market, economic growth, and better-than-expected consumer spending. Inflation will return to 2%, Bostic said in Florida on Thursday, but he isn’t in a “mad dash” to get there. He suggested a cut could come closer to the end of the year.
- Late Wednesday, Cleveland Fed President Loretta Mester said the Fed would likely cut rates at some point this year but didn’t suggest a time element. She also expects inflation will cool, but is willing to be patient and wait for more data.
- Futures traders put the highest probability of a first cut coming in September, at 45%, pushing back once widely held expectations that June would usher in the first one. Now there’s even a slight number of market watchers who see the chance of a rate increase.
What’s Next: The Atlanta Fed’s market probability tracker is implying a 3.6% probability of a quarter-point rate increase in June. The tracker shows there’s a 63% probability of rates staying the same. The CME’s FedWatch tool puts a sliver of probability—1.4%—on a June rate increase.
—Liz Moyer
***
Mortgage Rates Rise Again, While Existing Home Sales Drop
Just as the spring housing market was starting to look promising, the winds changed. Mortgage rates have started climbing again for the first time this year, while sales of previously owned homes dropped more than expected in March from the previous month, and average home prices are still rising.
- The average 30-year fixed mortgage rate jumped to 7.10% from last week’s 6.88% and was the highest rate since late November, Freddie Mac said. Mortgage News Daily’s 30-year fixed rate gained roughly half a percentage point from the end of March to 7.41%.
- Existing home sales fell 4.3% to a seasonally adjusted annual rate of 4.19 million, well below the long-term average of five million amid low inventory, National Association of Realtors chief economist Lawrence Yun said. Houses linger on the market for 33 days, up from 29 in March 2023.
- Even though housing inventory rose 4.7% from February to March, the median home price rose 4.8% from last year to $393,500. Higher prices and mortgage rates pushed buyers’ median monthly payment to a new high of $2,775 on April 14,
Redfin
said.
-
D.R. Horton
,the nation’s largest home builder, reported better-than-expected quarterly earnings and revenue, and raised its full-year revenue forecast to between $36.7 billion to $37.7 billion. A shortage of housing at affordable prices helped increase net sales orders 14% from 2023.
What’s Next: D.R. Horton and other home builders expect to benefit from demand for new construction because of a lack of existing homes available for sale. It sees full-year deliveries of 89,000 to 91,000, up from its earlier estimate of 87,000 to 90,000.
—Janet H. Cho and Shaina Mishkin
***
Do you remember this week’s news? Take our quiz below to test your knowledge. Tell us how you did in an email to thebarronsdaily@barrons.com.
1. Existing home sales fell 4.3% in March and are running well below the long-term average. When was the last time sales dropped that much?
a. November 2023
b. March 2023
c. November 2022
d. March 2022
2. China’s economic growth beat expectations despite persistent pressure in the property sector. What was the first quarter gross domestic product gain in the first quarter?
a. 4.5%
b. 5.3%
c. 5.7%
d. 6.3%
3. Retail sales beat expectations in March rising 0.7% as consumers continued to spend. But there were signs of some things slowing down. In which of the following areas did consumers pull back spending?
a. Furniture stores
b. Clothing and accessories
c. Sporting goods
d. All of the above
4.
United Airlines
said it would have turned in a first quarter profit if it weren’t for expenses related to
Boeing
’s
safety issues that have led to production delays. How big were these expenses?
a. $200 million
b. $250 million
c. $300 million
d. $350 million
5. Colorado State University’s latest Atlantic hurricane forecast shows expectations for a busy season starting June 1, higher than the average of 14.4 named storms from 1991 to 2020. How many named storms does it predict this year?
a. 19
b. 23
c. 27
d. 30
Answers: 1(c); 2(b); 3(d); 4(a); 5(b)
—Barron’s Staff
***
—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner
