Tesla’s Bullish Earnings Fail to Lift Stocks as Bond Yields Rise

On Oct. 25, bond yields headed higher again after a brief decline in the morning, cooling off a rally in tech shares.
Tesla’s Bullish Earnings Fail to Lift Stocks as Bond Yields Rise
Traders work on the floor of the New York Stock Exchange in New York City on Oct. 22, 2024. Spencer Platt/Getty Images
Panos Mourdoukoutas
Updated:
0:00
News Analysis

A positive earnings surprise from Tesla revived investor interest in tech shares last week, but it was not enough to lift the overall equity market higher by the end of the week, as elevated bond yields tapered investor enthusiasm for risky assets.

The S&P 500 ended Oct. 25 at 5,808.12, down by 0.96 percent for the week; the Dow Jones ended at 42,114.40, down by 2.68 percent; the tech-heavy Nasdaq ended at 18,518.61, up by 0.16 percent; and the small-cap Russell 2000 ended at 2,207.99, down by 2.99 percent.

Meanwhile, bond prices declined, sending yields higher. The benchmark 10-year U.S. Treasury bond ended the week with a yield of 4.246 percent, up from 4.082 percent at the beginning of the week.

Last week’s market performance differed from that of the previous week, when stocks ended the week higher while bonds held steady on mixed earnings and an inflation outlook.

Still, corporate earnings and bond yields continued to move markets last week, as they are the two factors determining valuations in every asset category with a future payoff.

“As the week wraps up, we’ve seen a mixed market landscape,” Cliff Ambrose, founder and wealth manager at Apex Wealth, told The Epoch Times via email. “Stocks had an uneven run, with gains in tech and consumer sectors buoyed by strong earnings, while other areas pulled back amid ongoing inflation concerns and interest rate speculation.”

Following Netflix’s solid earnings report from the previous week, Tesla’s report last week confirmed that large tech companies can deliver superior market returns because of persistent demand for their products and strong barriers to entry that keep competition out of their market.
But there are exceptions. For instance, tech giant IBM reported lackluster earnings because of a weak showing in its traditional infrastructure business. Its shares dropped, moderating the gains in the tech sector.

Meanwhile, rising bond yields during the week spooked investors twice. On Oct. 23, the 10-year bond yield hit 4.24 percent, sending the Nasdaq 1.65 lower.

Then, on Oct. 25, bond yields headed higher again after a brief decline in the morning, cooling off a rally in tech shares and taking interest-sensitive sectors, such as banks and homebuilders, lower. For instance, JPMorgan, which reported solid earnings a couple of weeks ago, was down by 1.19 percent on Oct. 25 and by 1.36 percent for the week. Homebuilder D.R. Horton was down by 1.89 percent on Oct. 25 and by close to 8 percent for the week.

Bond yields increased on new data confirming that the U.S. economy remains strong. On Oct. 24, the Labor Department reported that initial jobless claims declined by 15,000 from the earlier week to 227,000 for the period ending on Oct. 19. It’s the lowest reading for the month and below the market expectation of 242,000, suggesting that the U.S. labor market remains resilient.

On Oct. 25, the University of Michigan reported that five-year inflation expectations remained at 3 percent, down from a near one-year high of 3.1 percent in September but still above the 2 percent consistent with the Fed’s “price stability” definition.

The resilient labor market and elevated inflation expectations increase the chances that the nation’s central bank will be less aggressive in cutting interest rates in upcoming monetary policy meetings—a bearish scenario for the bond market.

According to FedWatch, the probability of a 50-basis point cut in the Federal Funds dropped from 9.6 percent a week ago to 4.9 percent on Oct. 25.

Michael Kodari, CEO at KOSEC Securities, said he sees the mid-cap segment of the equity market getting overvalued. This segment has been driven by institutional inflows rather than company fundamentals, creating a misalignment between price levels and intrinsic value.

“These inflows appear to be a temporary allocation strategy rather than a reflection of growth potential, which raises caution for sustained gains in this segment,” he told The Epoch Times in an email.

Meanwhile, Kodari is cautious, especially in overinflated mid-cap plays.

“Investors would benefit from a patient approach, with an eye on macroeconomic shifts that could reprice risk in the months ahead,” he said. “We anticipate a necessary recalibration as liquidity retreats, creating compelling entry points for fundamentally sound assets.”

Ambrose keeps an eye on future macroeconomic reports, too.

“Looking ahead, markets are likely to stay sensitive to upcoming economic reports and Fed announcements, which could shape the direction for stocks, bonds, and commodities in the near term,” he said.

Panos Mourdoukoutas
Panos Mourdoukoutas
Author
Panos Mourdoukoutas is a professor of economics at LIU in New York. He also teaches security analysis at Columbia University. He’s been published in professional journals and magazines, including Forbes, Investopedia, Barron's, New York Times, IBT, and Journal of Financial Research. He’s also the author of many books, including “Business Strategy in a Semiglobal Economy” and “China's Challenge.”