Investor Spotlight: US earnings week three preview

Despite bullishness on Wall Street, earnings season continues to disappoint. In this week’s Investor Spotlight, we look ahead to week three of the US earnings season and preview the results of Tesla, Microsoft, and Boeing.

Earnings expectations for Q4 continue to slide

The underperformance of S&P500 company earnings continued last week. As market participants near the halfway point of the reporting period, S&P 500 companies are forecast to deliver a 4.6% contraction in profits for the quarter. That’s down from last week’s estimate for the period and below the 3.2% estimate from prior to the commencement of earnings season.

As we’ve noted several times, the market’s results are bookended by cyclical sectors. Energy and industrial stocks have posted the strongest earnings, while consumer discretionary and materials have posted the weakest. In saying that, even the energy and industrial sectors have proven relatively underwhelming, with EPS estimates for both being lowered over the past three weeks.

Attention shifts to the tech sector now, as the market readies for a spate of mega-cap earnings reports. On average, analysts forecast a 9.8% drop in information technology for the fourth quarter. Several major tech companies, including Microsoft, Amazon, and Alphabet, have flagged job cuts in recent weeks, stoking fears of weaker growth from these businesses.

S&P challenges the world’s most-watched trendline

Despite the weak earnings numbers, the S&P 500 has pushed higher since the beginning of 2023. Buoyed by China’s reopening and hopes of a less aggressive US Federal Reserve, the index once again tested its downward-sloping trendline resistance last week.

The market failed to break that level. However, buying support appears to be strong around 3900. A break of resistance could open a rally towards 4140.

Three stocks to watch in the week ahead.

• Tesla

Now more than ever, Tesla will be one of the most closely followed reports this earnings season. The stock has had a horror run in the past twelve months. First, rising interest rates have torched its valuation. Secondly, weakening economic activity and persistent supply disruptions (especially in China) has hindered the company's operations and profitability. Thirdly, investors have dumped Tesla shares after Elon Musk’s acquisition of Twitter and his increasingly erratic and distracted behaviour.

Tesla has also delivered a negative update to the market recently, with the company missing its delivery targets for the quarter. Analysts are now forecasting Tesla will post EPS of $1.32 for Q4 - a still respectable growth number of 16.76%. This will come from estimated revenues of $US28.3 billion.

Analysts remain generally upbeat about the outlook for Tesla shares, especially as its valuation falls. Out of 32 analysts, 25 recommend a buy, while 12 suggest a hold and five a sell. The consensus price target is at a heft premium to the current market price of $196.22 per share.

Tesla stock is in a clear downtrend, although there are tentative signs of a rebound emerging. Price is challenging trend channel resistance as the weekly RSI moves out of oversold territory. Technical support is just above $100, while a break out will potentially open a rally to the 200-week MA.

Tesla weekly chart

• Microsoft

Although a mature business, the multiple compression that has befallen “growth” stocks as interest rates climbed has also impacted Microsoft's share price. Coming into the fourth quarter earnings period, the company’s stock has shed roughly a third of its value since its highs at the end of 2021.

The company is suffering from a weaker fundamental outlook. It delivered a rare profit warning last week amidst soft demand for its cloud and PCs and announced the culling of 5% of its workforce. Analysts are estimating a 7% drop in Microsoft’s earnings this quarter to $2.29, as topline growth slows to 2.4%.

Even in light of the weakening fundamentals, analysts remain overwhelmingly optimistic about Microsoft shares. It holds an emphatic buy rating, with 47 surveyed brokers recommending that course of action, five suggesting a hold, and one a (strong) sell. The consensus price target is $291.34.

Microsoft shares remain in a downtrend, with price action still defined by lower highs and lower lows. Buying support appears to be around $220 per share, with dips below the 200-week MA bought. The next level of resistance is around $245, while the bulls will be keeping an eye on trendline resistance.

Microsoft weekly chart

• Boeing

Boeing is expected to post a return to positive earnings this quarter - only the second time the company has done so since the onset of the pandemic. EPS is tipped to rise to $US0.24 for the fourth quarter, driven by revenues pushing above $US20 billion and a nearly four-year high.

The solid result comes us deliveries rebounded in 2022. The company delivered 480 commercial planes for the year, as international travel rebounded and airlines had to recertify aircraft grounded during the pandemic. Margins and the company’s cost base is likely to have improved markedly too, as supply-side disruptions ease following the pandemic.

The broker community is generally upbeat about Boeing stock. 21 out of 28 recommend a buy, while the remaining suggest a sell. The consensus price target is $210.63 according to Reuters, which is roughly around the market price days out from the company’s results.

Boeing’s share price is in a short-term uptrend within a longer-term downtrend. Price has reverted to the 200-week MA as the weekly RSI pulls back from oversold territory and indicates a reversal in momentum. A confluence of support sits around $190 to $200.

Boeing weekly chart