As the first quarter earnings season approaches, forecasts for corporate profits in the U.Sstock market have been revised downward multiple timesHistorically, markets tend to decline rather than rise during the final phases of interest rate hikes and the initial stages of cuts, largely due to continuous adjustments in profit expectationsThis situation has intensified, especially following the collapse of several regional banks, even as the larger banks report robust first-quarter earningsDespite the seemingly strong performance of the economy on the surface, fears concerning a potential recession are once again on the rise.

Last week, the number of initial jobless claims in the United States hit 245,000, with the previous figure revised up to 240,000. Economic indicators released on Thursday painted a bleak picture, showcasing signs of loosening in the economy—particularly in the labor market—prompting fresh concerns about a recession

On that day, all three major stock indices in the U.SdeclinedTesla's disappointing earnings and its strategy of further price cuts exerted a significant downward pull, with the share price crashing nearly 10%, making it the largest drag on market performanceThis ongoing price war is expected to affect the company’s gross margins in upcoming quarters, also impacting other electric vehicle manufacturersFurthermore, with another rate hike likely in May, statements from the Federal Reserve will be pivotal in shaping market sentiments.

Profit struggles lead to share price drop exceeding 50%

Netflix urgently needs to demonstrate its profitability

Netflix stands as the first technology company to release its earnings report this season, but the past year has proven to be a tumultuous period for the streaming giant

Following the strong growth of its competitor Disney, Netflix not only experienced a slowdown in user growth but also lost its position as market leaderFurthermore, the pace of revenue growth has reached the slowest rate in its history, marking the first year of profit decline in seven yearsConsequently, Netflix's stock price plummeted by more than 50%.

These harsher conditions have compelled Netflix to fundamentally pivot its business strategy, with plans to clamp down on password sharing and aggressively market an ad-supported tier to revive revenue growth and restore profit marginsMarket expectations have started to shift, fostering the belief that 2023 could see Netflix back on a positive trajectory—yet the transition between business models may reveal to be rocky.

In its first-quarter results, Netflix reported revenues of $8.162 billion, marking a 3.7% year-on-year growth, the second-lowest revenue growth rate on record

Operating income fell to $1.714 billion, down 13% year-over-year, with an operating margin of 21%. The net income reported was $1.305 billion, an 18% drop year-on-year, with a net margin of 20%. During this quarter, Netflix added only 1.8 million new subscribers, lower than the 2 million expected by Wall Street analysts, bringing its global paid subscriber count to 232.5 millionFollowing the earnings announcement, Netflix's stock price experienced an immediate drop of up to 12%.

Looking ahead, Netflix’s top priority is to demonstrate improvements in its revenue and profitability profiles throughout 2023. This is of particular importance given that Netflix touts itself as a profitable entity while competitors like Disney continue to operate at a loss and burn capital.

Tesla's multiple price cuts impact profitability

Stock price nosedives by 10%

Tesla’s latest earnings report showcased a notable decline, with the latest round of price reductions causing its stock to plunge nearly 10%, making it the largest detractor from overall market performance

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The ongoing price war is predicted to exert pressure on the company's gross margins in the coming quarters, similarly affecting other electric vehicle manufacturers.

Since the start of 2023, Tesla has enacted several price cuts across various markets to spur demand, making the focus of their first-quarter earnings report predominantly on the implications of these cuts on profit marginsPrice reductions signal Tesla's need to stimulate demand, clearly showing that they are trading margins for volumes in the short termWhile the period has seen record deliveries, the rise compared to the previous quarter was only marginal, indicating that the price cuts did not sufficiently meet demand expectations.

Tesla has initiated additional price reductions for the second quarter, which may further affect profitability

The company appears to prioritize sales volume over short-term profit, leveraging its cost structure to drive sales—even considering it has the opportunity to monetize these sales later, as with purchases of FSD (Full Self Driving) services.

Currently, most investment banks maintain a positively optimistic view on Tesla's long-term market positioning, taking into account its cost structure and capability to provide comprehensive solutions (such as software, services, and energy storage). Specific cost factors include new factories, the 4680 batteries, adjustments of raw material expenses, and incentives provided by the Inflation Reduction Act (IRA). Tesla also aims to reduce the cost per vehicle by approximately 50% using its next-generation platformImportantly, Tesla is increasingly looking to monetize gains from its energy storage segment.

However, in the short term, it is likely that electric vehicle manufacturers will all continue to face the repercussions of price wars

Some analysts caution that Tesla may implement further price reductions throughout the year, suggesting that the first quarter may not yet represent a bottoming out of its profitabilityShould Tesla manage to offset lower prices through cost reductions, maintaining margins could see a turnaround, but lackluster earnings data may once again alarm the market about its production capacity and the absence of new models, putting the 2023 market's average expectations at risk.

U.Sbig banks temporarily secure

But sustainability of deposit inflows remains in question

This week, JPMorgan Chase, Wells Fargo, and Citigroup have started the earnings season for the banking sector in the United States

Following suit, a wave of other American banks will report their performanceThe current focus remains on the outflow of deposits following the collapse of Silicon Valley Bank and Signature Bank last March, where restoring market confidence is crucial.

JPMorgan Chase, the largest bank in the U.S., reported spectacular earnings, with a 52% rise in profits and record high revenues for the first fiscal quarterCitigroup and Wells Fargo also reported profit growth for the quarterThe combined profits of these three large banks exceeded $22 billion, growing by more than one-third year-on-year, with combined revenues surpassing $80 billion, a 19% increase year-on-yearThey benefited significantly from higher interest rates on loans while the interest paid to depositors has not surged at the same pace.

JPMorgan Chase estimated on April 14 that approximately $50 billion in new deposits flowed into the bank following the turmoil in March, although executives cautioned that this influx of deposits may not necessarily remain in the bank

Similarly, leaders from Wells Fargo and Citigroup mentioned that they absorbed new deposits amid the upheaval.

The banking crisis has not been without precedentFor example, the United States experienced the Savings and Loan Crisis in the 1980s and 1990s, during which 1,043 of the nation's 3,234 savings and loan institutions were closed or restructured by government-established Federal Savings and Loan Insurance Corporation (FSLIC) or Resolution Trust Corporation (RTC). The risk of smaller banks may still emerge in the future, but systemic banks, which undergo rigorous annual stress testing, are deemed relatively safe.

However, the outlook for U.Sbanking has radically changed over the past monthAs recession risks continue to escalate, markets are preparing for tightening credit supply

Attracting and retaining capital is essential, prompting the necessity for higher-saving interest ratesIt is anticipated that interest rates will peak sooner than expected, and as crises loom, stricter regulations will likely increase costs for banks and restrict growth.

U.Sstocks enter earnings test phase

The "calm before the storm" is about to end

The state of the U.Seconomy remains relatively robust, with compelling evidence that inflation is declining and economic growth continues at a steady pace

Despite recent signs of weakness, the labor market remains stronger than in previous timesCurrently, equity investors are primarily concerned about the potential shrinkage of bank lending, especially among smaller regional banks, along with the continued inverted yield curve, a reliable indicator of past recessionsEven without the ability to lower rates due to high inflation, another rate hike is likely in May, potentially the last of the year.

While this may alleviate valuation pressures, the real profit challenges are only just beginningAs the first-quarter earnings season officially kicks off, the "calm before the storm" in the U.Sstock market is drawing to a closeIn the coming days, heavyweight stocks like Microsoft, Alphabet, Amazon, and Meta will release their results, while Apple is set to report on May 4.

Technically, the tech-heavy Nasdaq 100 index has consolidated narrowly around 13,000 following a seven-month high breakthrough at the end of last month

The movement since mid-March appears akin to a "bull flag," which typically suggests a continuation of an uptrend should it break out above 13,200, potentially rallying towards the previous resistance level of 13,700 or higherAs the summer approaches, a confirmed breakout could signify strong bullish momentum.

While the possibility of a significant downturn appears remote at this stage, a persistent drop below 12,900 could indicate a deterioration in prospects, particularly if earnings reports from high-weight tech giants turn out to be disappointing, leading to a potential retreat below 12,000.

The S&P 500 index has staged a substantial recovery since its March low of 3,800, establishing a series of higher highs and peaking at 4,172 during this month