Special Guest of this Magazine丨Matt Weller
（Matt Weller）
Editor丨Wu Haishan
U.S. equities got off to a rough start but quickly recovered losses and hit new all-time highs, especially in technology stocks, which continued to climb, driven by upbeat Netflix data and optimism about a soft landing for the U.S. economy.
In the next phase, the market will focus on corporate earnings, especially those of tech giants. The "Big Seven" (Microsoft, Apple, Google/Alphabet, Amazon, Nvidia, Facebook/Meta, and Tesla) accounted for more than 100% of the S&P 500's earnings growth, and now the "Big Seven" stocks are trading at 50 times earnings, with the only thing that could drag down the Nasdaq 100 is poor earnings performance.
Tesla, which took the lead, reported results that fell short of expectations after market hours on Thursday. But based on recent price action, Nasdaq-100 traders don't look particularly worried about upcoming earnings releases. The Nasdaq 100 has already made new all-time highs above $17,000 with little resistance above.
Focus on the performance of the "Big Seven in Technology".
A few years ago, the "growth" tech stocks in the Nasdaq-100 struggled against the backdrop of "prolonged interest rate hikes", but they have since matured and are now the beneficiaries of a strong economy and high interest rates.
The Big Seven are now trading at 50 times the price-to-earnings ratio, and the only thing that could drag down the Nasdaq 100 is poor earnings performance. Only Tesla has released its earnings report so far, looking ahead to the "Big Seven", each of which faces opportunities and challenges, but some common themes to focus on are the health of consumers and the economy as a whole, as well as the impact of artificial intelligence and the growth of augmented/virtual reality devices.
According to Zacks analysts, the overall earnings of the "Big Seven" are expected to increase by nearly 40% compared to the same period in 2022 against the backdrop of high revenues of 12%. According to LPL Financial, these seven stocks will account for more than 100% of the total earnings growth of the entire S&P 500 index, which means that the "S&P 493" could lose money in 2023.
Earnings aren't the only basic indicator that the Big Seven outperform the rest of the stocks. The difference is not at all in terms of sales growth (the Big Seven is expected to be close to 11% over the next two years, compared to 3% for the S&P 493) and net profit margins (about 20% for the Big Seven and about 10% for the S&P 493).
The Nasdaq 100 has already hit new all-time highs above $17,000 with little resistance above. As of the close of trading in the early morning of January 25, Beijing time, the index was at 17,499.3 points.
The "price war" squeezed Tesla's profits
It is unclear whether Tesla's profit plunge is a special case, but the pressure on the electric vehicle giant will obviously not be eliminated in the short term.
Ahead of the market on Wednesday, it rallied on reports that Tesla plans to start producing a new mass-market electric car in mid-2025. Tesla's fourth-quarter results were released after the market closed, and while the EV maker delivered record deliveries, it was achieved through significant price cuts, which had an impact on margins.
According to the financial report, Tesla reported revenue of $25.17 billion in the fourth quarter, an increase of 3% year-on-year, and earnings per share of $0.71, down 40% year-on-year, both of which were lower than the $25.6 billion and $0.73 expected by analysts at FactSet.
In terms of business, the full-year revenue of the most-watched automotive business reached US$82.42 billion, an increase of 15% over 2022. The energy division, which sells solar power and energy storage systems, is smaller than Tesla's core business, and its revenue rose 54% to $6.04 billion, which was the highlight of the earnings report. Tesla's "services and other" revenue rose 37% from the same period last year to $8.32 billion.
Affected by Tesla's poor performance in the fourth quarter of 2023, Hong Kong auto stocks are under pressure. As of the close, on January 25, NIO-SW, Xpeng Motors-W, Li Auto-W, and Great Wall Motors fell 4.67%, 3.36%, 0.54%, and 0.47% respectively.
The global EV market is heating up, with Tesla already lowering the prices of its Model 3 and Model Y in China in January 2023, and recently in Europe. The price of the Model Y was reduced by 4.2% to 8.1% in Germany, by 6.7% in France, by 7.7% in the Netherlands, and by 5.6% to 7.1% in Norway. Ford overtook Tesla as Germany's EV sales leader in 2023, with Ford's share of the German electric car market at 13.5% compared to Tesla's 12.1%. At the same time, Tesla's current market share of the electric vehicle market in the United States has fallen to 50%, down from 62% in the first quarter of 2023.
Tesla also faces stiff competition in China, with Tesla's EV sales in China falling by about 17.8% year-on-year, the biggest annual decline since December 2022.
Tesla's gross profit margin fell from 23.8% in the fourth quarter of 2022 to 19.3% in the first quarter of 2023, 18.2% in the second quarter, and 17.9% in the third quarter.
However, Musk's price reduction plan is to strive for a higher market share, because one of Tesla's most profitable divisions is actually Subscription (subscription) and Servicing (service), Tesla's shipments have risen steadily after the price cut in 2023, up 19% year-on-year. This seems to be the goal that Musk wants to achieve the most.
The situation in the Red Sea has also affected Tesla, preventing the transportation of parts to the factory, resulting in a shortage of parts.
Several of the above factors have not been good for Tesla's stock price recently. It's also important to note that Musk recently publicly stated at X (formerly Twitter) that he wants to gain 25% control of Tesla, otherwise he will be upset about developing Tesla into a leading company in the field of artificial intelligence.
Unlike companies such as Alphabet, Tesla does not have super-voting shares, i.e., there are no different kinds of shares. There are several ways for Musk to gain maximum control of the company, but it seems that all of them are bad for the stock price - one is to issue Musk common shares, which means Tesla will issue more shares to the market, diluting the holdings of other shareholders, and the other is for Musk to increase his control over the company by exercising all stock options, and his stake will increase to 23% But this will require extremely high taxes, which will eventually turn into forcing Musk to sell some of his shares to pay the relevant taxes, causing the stock price to fall, and another way for Tesla's board of directors to meet Musk's demands through buybacks, which will affect Tesla's cash flow.
U.S. stocks may climb in volatility in 2024
On the whole, at present, major Wall Street institutions are not pessimistic about the prospects of U.S. stocks in 2024, and many institutions have given a target price of more than 5,000 points.
The risk of a "hard landing" in the United States is minimal, which also dispels some of the market's concerns. The reason is that, from a historical perspective, the US business cycle is about 64 months, and the first recession may not wait until 2025.
At present, the structure of the U.S. stock market industry has also undergone major changes, and U.S. listed companies are increasingly less affected by the business cycle. In 1998, the S&P 500 index accounted for 58% of the industry structure, 6% of the pan-tech sector, and 36% of the defensive sector, and by 2023, the cyclical sector has significantly decreased to 35%, the pan-tech sector 37%, and the defensive sector 29%, so even if the US economy slows, it does not necessarily mean that the earnings of US companies will also slow down.
At the same time, the fundamentals of U.S.-listed companies are still resilient, and the probability of a recession in the short term is not high. We expect double-digit earnings growth across key sectors, led by the technology and healthcare sectors. From the top 15 weighted stocks in the S&P 500 index, it can be seen that although the US GDP may slow down in 2024, the earnings growth of the major weighted companies in the United States is still considerable. In addition to Apple's non-double-digit growth, Nvidia's earnings growth in 2024 may exceed 200%, and other technology sectors also perform well, including pharmaceuticals, such as the very hot weight loss drug company's profit growth is also worth looking forward to.
From a technical point of view, the S&P 500 continues to rise within its ascending channel, hitting new all-time highs. Buyers will aim for the round figure mark of 4,900 points, followed by the crucial psychological level of 5,000 points. Immediate support is located at 4800, the December high, a break of which would negate the short-term uptrend. A break below last week's low of 4710 could lead to a new low.
(The author is Global Head of Research, FOREX.com Group.) This article was published in the January 27 issue of Securities Market Weekly, with the original title "Tesla's earnings report falls short of expectations, but traders don't seem to be worried about the Nasdaq 100 hitting a new all-time high". The individual stocks in this article are only examples and do not make trading suggestions. ）