Fresh Highs As Earnings Announcements Roll In

The Dow and S&P 500 opened sharply higher this morning after some upbeat earnings announcements from Netflix, Elevance and General Dynamics (see below). Stocks have fully recovered from their early January swoon and are now making fresh highs. On the other hand, bond prices have reset lower to start the year. It seems traders (yet again) misread Fed intentions with regard to interest rate cuts.

One reason the Fed won’t likely slash rates in the near-term is that the economy continues to hold up. CNBC’s latest “Rapid Update” survey shows economists are again upgrading their growth outlook. Last October they expected 1.2% economic growth for the fourth quarter of 2023 followed by 1% for the first quarter of 2024. Now those projections are looking more like 1.9% and 1.4%, respectively. Economists and investors generally expect growth to slow at some point, but for the past couple of years have consistently misjudged the timing. The survey also suggested inflation will slow to 2.4% by the end of this year. A separate survey by Bloomberg projects 2.6%, but either way inflation is expected to decelerate this year.

S&P Global’s monthly surveys show US business activity picked up this month. As expected, the services side of the economy is much stronger than manufacturing, which has suffered through recessionary conditions for more than a year now. But even manufacturing seems to have stabilized and turned up. S&P notes new orders are particularly strong. And believe it or not, executives say they’re still struggling to find enough skilled workers. The cost of doing business is generally trending lower except that manufacturers called out higher transportation & fuel costs.

Netflix (NFLX) reported much better than expected fourth quarter results and the stock is up 12% today. The streaming service added 13 million new subscribers compared to Wall Street analysts’ expectation for 9 million, and just 2 million achieved in the year-ago quarter. So this was a blowout and it proves the company’s crackdown on password sharing, and the pivot to cheaper ad-supported plans worked. Compared with other streaming services, Netflix clearly has stronger profitability, cashflow, and content. Management says it can continue to grow revenue at a double-digit rate.

Elevance (ELV) managed to post 7% profit growth during the fourth quarter, which was slightly better than anticipated. More importantly, medical costs were lower than expected. And management confirmed its 2024 outlook, which is in line with analysts’ projections. Health insurance carriers have been under pressure as demand for surgical procedures spiked. So the fact that management isn’t warning of deterioration in 2024 is encouraging.

General Dynamics (GD) popped nearly 5% after reporting fourth quarter results. Aerospace sales jumped 12% from a year ago, Marine Systems grew 15% and Combat Systems rose 8.5%. The company’s operating profit margin and cashflow improved a bit. Finally, management issued upbeat guidance for 2024.