Making sense of the markets this week: July 23, 2023

High interest a boost for banks’ earnings?

With U.S. banks and some of the tech-heavy hitters kicking off earnings season this week, there’s no shortage of market news. Let’s dive in! 

Much like what we saw last year, the typically boring retail bank profits continue to soar, whereas the flash and panache of investment banking divisions continues to wither in the wake of decreased IPOs and revenue-generating commercial activity. (All values below are in U.S. currency.)

JPMorgan saw 44% gains in net interest income, which offset its investment banking reductions. “The U.S. economy continues to be resilient,” said CEO Jaime Dimon. “Consumer balance sheets remain healthy, and consumers are spending, albeit a little more slowly. Labour markets have softened somewhat, but job growth remains strong.”

Bank of America, Wells Fargo, Morgan Stanley and Citigroup also saw increased interest revenue drive earnings beats. All were up by 2% to 4% after announcing positive earnings numbers.

Perhaps the biggest news from this group is about perennial overachiever Goldman Sachs. As the only one to post an earnings loss, the investment banking titan had some explaining to do. Unsurprisingly, a lack of merger activity, as well as initial public offerings didn’t add much to its bottom line. Instead it was the write-downs on commercial real estate, as well as the loss taken on the sale on the bank’s GreenSky fintech unit, that really cut into quarterly profits.

Despite the negative earnings report, Goldman shares were down only about 2% in pre-market trading.

Given the divergence between the super-powered U.S. economy and Canada’s more moderate outlook, it might not be a great idea to project these results directly onto Canadian bank earnings expectations. That said, Canadian banks are more similar to the retail banking operations of Bank of America than they are to the high-flying investment banking Goldmans of the world. Higher interest revenues should be solid wind in the sails of Canada’s Big Six Banks later this year. For more information, see our article on Canadian bank stocks at MillionDollarJourney.ca.

Canadians looking to invest in U.S. banks can do so through TSX-listed ETFs, such as the Harvest US Bank Leaders Income ETF (HUBL), RBC U.S. Banks Yield Index ETF (RUBY) and BMO Equal Weight US Banks Index ETF (ZBK). They can also get single-stock exposure to JP Morgan, Bank of America and Goldman Sachs in Canadian dollars through Canadian Depository Receipts (CDRs) listed on the Neo Exchange.

Tesla races past the competition

Buried in the details of Tesla’s earnings report was this little nugget: The Tesla Model Y is the top-selling vehicle in the world in 2023 so far. 

Think about that for a second. An electric car (EV)—which starts at just under $60,000—was the most purchased vehicle on the planet. I find that kind of incredible, considering there wasn’t a single electric car in the top 10 only three years ago. (Remaining numbers in this section are in U.S. currency.)

Tesla’s (TSLA/NASDAQ) earnings per share came in at $0.91 (versus $0.82 predicted) and posted revenues of $24.93 billion (versus $24.47 billion predicted). Tesla shares slumped more than 9% Thursday but then recovered 1.1% in pre-market trading Friday morning. 

Here are a few takeaways from Tesla’s earnings report:

• Tesla’s revenues hit a new record for the company.
• The core automotive business saw revenues go up 46% year-over-year (YOY).
• Operating margin dropped to 9.6% due to price cuts—the lowest margin in at least five quarters.
• Tesla still aims to deliver 1.8 million vehicles this year, but factory upgrades may bring the company up slightly short of that goal.

Tesla’s price point (currently the seventh biggest publicly-traded company in the world) looks to be a bit overoptimistic for forecasting future profit flows. That said, it’s certainly noteworthy to see these sorts of sales numbers generated in the face of so much negative PR generated by co-founder and CEO Elon Musk.

In other electric vehicle news, it appears that Tesla’s price-cutting strategy has influenced the rest of the industry. Ford announced this week that it’s discounting the price of its F-150 Lightning electric truck by $10,000. I continue to believe this vehicle is the best benchmark we have when it comes to forecasting the speed of widespread EV adoption. If the rural, truck-loving folks from the areas I grew up in start going electric, this whole shift might happen even more quickly than predicted.

Don’t change the channel on Netflix

Given Netflix’s big subscriber surprise last year, perhaps investors’ hopes were raised a bit too high going into this week’s earnings call.

Even though Netflix (NFLX/NASDAQ) posted earnings per share of $3.29 (versus $2.86 predicted) and increased subscriptions by 8% (5.9 million customers), the streaming giant’s stock price was down 8.4% in after-hours trading but like Tesla, was set to recover slightly Friday. The market was clearly concerned about the slight revenue miss of $8.19 billion (versus $8.30 billion predicted).

It will be interesting to see just how much subscriber growth the company is able to garner by eliminating its lowest-price subscription plan and continuing its crackdown on password sharing. CNBC reported that, while the Hollywood labour strike would no doubt hurt all streamers, Netflix (with its deep bench of programming) was the best placed to weather the storm.

Inflation and market returns

While the reduction in Canada’s interest rate to 2.8% made headlines again this week, we thought it might be worth taking a look back to contextualize the last few years of inflation-dominated news.

Nick Maggiulli recently penned this interesting piece that looks under the hood of the current market drivers and shows just how impactful inflation has been—even if the current downward trend were to continue. Here are some interesting takeaways:

Maggiulli is quick to point out:

“I don’t say this to scare you or because I plan to change my investment strategy if this turns out to be correct. No, I say it because I have to mentally prepare myself for what may come. Because if I don’t, then I might abandon my beliefs when the going gets tough […] Because choosing an investment philosophy is only half the battle. The other half is sticking to it.”

Sounds like a sound mindset to us!

About Kyle Prevost

Kyle Prevost is a financial educator, author and speaker. He is also the creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course.

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