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Fall of the Titans

Two of the Behemoths in the U.S. stock market behaved badly this week, as tech giants Netflix and Tesla were put in the penalty box and will likely remain there for a short period of time. Both companies suffered disappointing earnings reports on Wednesday night. Netflix showed positive subscriber growth, most certainly a result of the crackdown on password sharing, but the streaming giant offered up a less-than-rosy forecast. Meanwhile, Tesla CEO Elon Musk announced a sky-high spending plan to position the company as the premier provider of fully self-driving cars. Investors possibly got spooked by the high price tag and a production lag coming off the assembly line, but, in the short run, the EV maker is set to cut the prices of its current lineup. Tesla's strategy to boost sales through price cuts is likely to power its' revenue growth while squeezing margins - precisely why the stock got pummeled 11% this week.

Just when you think these two Titans are down for the count, they tend to recover nicely and that is due to solid management and incredible products helping them to win the long game. Using Netflix as an example, they are transforming their business model into a streaming service with a cheaper subscription plan that includes advertisements. It can make more money with consumers using its' ad-tier plan than its' pricier traditional subscription. Why? The plan will enable Netflix to raise its subscription prices while also making money on ads. It’s early days and investors will assess risks from the ongoing strike in Hollywood, which also has an impact up here in Canada; the rare twin strikes by Hollywood actors and film and television writers are casting a pall over British Columbia's creative industry, which has become a hub for American film and TV production. Despite the job action, analysts said Netflix is well positioned due to its solid pipeline of shows and international production crew. Don’t kid yourself, Netflix and Tesla are two of the greatest investments of all time, 

U.S. Banks continued the earnings parade with Bank of America's profit rising in the second quarter as it earned more from customers' loan payments, while its' trading arm fared better than expected. Bank of New York Mellon beat Wall Street targets for second-quarter profit as the U.S. Federal Reserve's aggressive policy tightening boosted income earned from interest payments on loans. 

This helped the Dow in a catch-up trade to other stocks other than the Mega Cap names, marking its ninth straight day of gains, the longest winning streak since 2017. Quite an achievement considering the various economic hurdles we’re jumping. But it’s not all rosy over in the U.S., as both the S&P 500 and the NASDAQ took a hit. Why, you ask? Well, growth stocks are running out of steam and August is the 3rd weakest-performing month in the markets with September being the worst.

In other Technology news, the Biden administration said that Top A.I. companies including OpenAI, Alphabet, and Meta Platforms have made voluntary commitments to the White House to implement measures such as watermarking AI-generated content to help make the technology safer.

Looking ahead to next week, all eyes will be on the Federal Reserve which will likely decide on an interest rate hike, and 168 S&P 500 companies report earnings which is a pretty good setup for a choppy week in the markets.

Happy trading and stay safe,

Ian David Clark, Portfolio Manager of the Ocean Wealth Team at PI Financial