Investment Insights Notes from the Kitchen

Better Earnings Spark Stocks Rally

  • Jul 27, 2022
  • Andrew Gillham

Corporate earnings picked up after a shaky start to the quarterly reporting season, sparking a rebound in stocks. The blue-chip S&P 500 and technology focussed Nasdaq indices gained 3.6% and 3.7% respectively.

Netflix shares jumped more than 7% the day after it revealed it had only lost 970,000 subscribers during the second quarter. Netflix, the worst performing stock (-71%) in the S&P 500 during the first half of the year, had previously warned it could lose 2 million accounts during the period.

The video streaming company is battling fierce competition from lower priced rivals such as Disney+, HBO and Amazon Prime at a time when consumers are also cutting spending on non-essential items due to the soaring cost of living.

However, the huge success of the latest season of Stranger Things and confirmation that Squid Game will be renewed for a second season has helped to stem the cancellations. Netflix also revealed it will work with Microsoft to launch a lower cost ad-supported service next year.

Tesla was another standout performer last week. Shares in the electric vehicle manufacturer rose almost 10% after it reported it generated $16.9 of revenue during a difficult quarter in which lockdowns at its factories in China constrained production.

Tesla also revealed it had sold most of its holdings of Bitcoin which were worth around $2 billion prior to this year’s rout. CEO Elon Musk, who had underlined his commitment to cryptocurrencies by tweeting “Tesla will not be selling any Bitcoin” last year, insisted the motive of the sale was to boost cash positions while factories in China were closed. He added “we have not sold any of our Dogecoin”.

The chaos and delays at airports didn’t stop airlines from generating bumper profits during the quarter as the pent-up demand for air travel enabled them to increase fares to offset higher fuel costs. American and United airlines both reported their first profits since the start of the pandemic.

It was a similar story for Ryanair which posted a €170 million profit in the quarter. The budget-airline carried 45.5 million passengers, 9% higher than pre-covid levels, and cancelled just 0.3% of flights.

The profitability of the airline was also boosted by a successful hedging strategy which enables it to buy fuel at around $60 a barrel, a deep discount to current market prices, but it was unable to give any forward profit guidance due to the emergence of new variants of Covid-19. Chief Executive Michael O’Leary revealed customers are booking less far ahead than before the pandemic.

The European Central Bank raised its deposit rate by 0.5% to zero, ending an 8-year experiment with negative interest rates. The ECB has been more cautious hiking rates than other central banks, mindful that tighter monetary policy could push the economy into recession.

It has also sought to avoid triggering a sharp rise in borrowing costs for highly indebted members of the Eurozone, including Italy and Greece. Italian debt was already in the spotlight following a week of political turmoil which resulted in the resignation of Prime Minister Mario Draghi on Thursday morning and 10-year government bond yields spiked to 3.5%.

In addition to the rate hike, the ECB unveiled a “Transmission Protection Instrument” designed to stop borrowing costs rising more sharply in these countries relative to members in a stronger financial position such as Germany and France. With conditions attached, including adherence to EU fiscal rules, the ECB will buy more public-sector bonds where necessary.

Energy prices were mostly range bound during the week and Brent Crude edged lower to $105 a barrel. On one hand investors continued to weigh the risk of Russia cutting gas supplies to Europe and on the other the prospect of lower demand due to slowing economic activity.

(Cover Image Source: Viacheslav Bublyk)

TEAM Asset Management is a trading name of Theta Enhanced Asset Management Limited which is regulated by the Jersey Financial Services Commission.