Weekly Market Wrap | 22 July 2023

#RecessionFear #Netflix_Tesla_JNJ #BankEarnings

#RecessionFear #Netflix_Tesla_JNJ #BankEarnings

Goldman Sachs cuts probability of recession to 20%

Probability of recession (Source: Wall Street Journal)

What Happened?

Amidst the ongoing debate about the possibility of a U.S. recession, Goldman Sachs has made a notable move by reducing the chances of an economic downturn. Jan Hatzius, the chief economist at Goldman Sachs, has lowered the probability of a recession in the next 12 months from 25% to 20%. This revision places the likelihood well below the 54% median among forecasters who participated in the recent Wall Street Journal survey. 

Why did it happen?

The decision was primarily influenced by recent data that has bolstered confidence in the ability to control inflation without resorting to a recession. Notably, the U.S. economy’s gross domestic product (GDP) is currently tracking at a 2.3% annual rate. Positive trends in consumer sentiment, declining unemployment, and reduced jobless claims have contributed to this improved outlook.

Despite expectations of some deceleration in the coming quarters, factors such as easing financial conditions, a rebounding housing market, and a thriving manufacturing sector suggest that the economy will continue to grow, albeit at a pace slightly below its trend.

Implications for the investors

With the reduced likelihood of an economic downturn, there could be increased investor confidence in the markets. Investors might feel more secure in making long-term investments, given the positive outlook for the economy. 

Additionally, Hatzius’ remarks regarding the inversion of the yield curve could influence investor behavior, encouraging them not to overreact to this particular indicator. However, it is essential for investors to remain cautious, as the discussion about a potential recession is far from extinguished.

Netflix, Tesla, and J&J release their Q2 results

Tesla, Netflix and JNJ Results (Source: Google Finance)

On Thursday, the U.S. stock market witnessed a mixed performance as the S&P 500 and NASDAQ faced declines, while the Dow Jones Industrial Average continued its upward trajectory for the ninth consecutive day. The notable drops in two tech giants,  Tesla and Netflix, following their quarterly results, contributed to the negative sentiment in the market. 

Tesla’s shares experienced a sharp decline of 9.74%, marking its largest one-day percentage drop since April 20. This came after the electric-vehicle manufacturer reported a decrease in its second-quarter gross margins to a four-year low, and its CEO, Elon Musk, hinted at potential price cuts.

Netflix, the streaming video company, also suffered a significant setback, with its shares slumping by 8.41%. This marked its biggest one-day percentage decline since December 15, as the company’s quarterly revenue, which increased by 2.8% YoY, fell short of expectations. 

In contrast to the declines in the S&P 500 and NASDAQ, the Dow Jones Industrial Average managed to climb higher, largely due to strong gains in Johnson & Johnson. The pharmaceutical giant saw its shares rise by 6.07% following the release of its results and an optimistic annual profit forecast. They increased their earnings outlook for the year from $10.65 to $10.75 per share.

As investors closely monitor economic indicators and corporate earnings, the market remains cautious and adaptable in response to various factors influencing the current financial landscape. Investors should reassess their strategies and focus on diversifying their portfolio.

US banks report positive performance

US Banks Q2 net interest income (in millions of $) (Source: Reuters)

Big U.S. banks have reported robust profits in the second quarter, buoyed by higher interest rates, which led to a surge in their shares. Bank of America and Bank of New York Mellon Corp reaped benefits from charging clients higher interest rates as the Federal Reserve raised borrowing costs to combat stubborn inflation. 

Bank of America’s net interest income (NII) rose by 14% to $14.2 billion in the second quarter, beating Wall Street estimates, and the bank expects a full-year NII growth of about 8% at approximately $57 billion. BNY Mellon also surpassed analyst expectations with a 33% rise in NII to $1.1 billion, while PNC Financial Services reported a 15% increase in NII to $3.51 billion for the second quarter.

Despite the positive results, some concerns loom over the banking sector’s outlook. Consumer spending has shown signs of pullback, loan growth has slowed, and increased deposit costs may cloud the future for banks. Moreover, a warning from U.S. custodian bank State Street of a potential decline of 12-18% on NII on a sequential basis due to lower deposit levels highlights the challenges faced by the industry. 

Goldman Sachs (GS) experienced a notable decline in profits during the second quarter due to challenges in its core businesses of dealmaking and trading, coupled with nearly $1 billion in impairment charges on consumer and commercial real estate holdings.

Nevertheless, signs of revival in investment banking and mergers and acquisitions (M&A) offer some optimism. Morgan Stanley predicted an uptick in M&A activity, with industries like financials and energy showing increased deal-making, and its backlog of deals growing.

IndexLevel1 Week1 MonthFrom Jan 1 2023
S&P 500 (US Stocks)4,535+0.61%+3.52%+18.62%
Nasdaq 100 (US Tech Stocks)15,497-0.71%+3.02%+42.66%
CSI-300 (Chinese Stocks)3,822-1.54%+0.32%-1.70%
Bitcoin (in USD)29,873-0.90%-0.14%+79.90%

Source: Google Finance, Bloomberg, Yahoo Finance, CNBC, Financial Times, Reuters, Business Times, CNN, Fashion United

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