Netflix in focus as stocks grapple with ‘higher for longer’ mantra

Thursday brought a mixed bag for US stocks as investors braced for Netflix to kick off the earnings season. While the S&P 500 saw a slight dip, the Dow Jones Industrial Average managed to hover just above the flat line after a previous session’s decline. However, the Nasdaq Composite slipped further, extending the recent downturn in the tech sector. Investor sentiment remained under pressure due to persistent inflation and a robust economy that shows little signs of cooling down despite elevated interest rates.

Indeed, the impending release of Netflix’s earnings after the market close could be considered the initial significant test of sentiment for the nascent U.S. first-quarter earnings season.

The S&P 500 began the day with gains for the fourth consecutive day, only to reverse course later in the session. This reversal occurred amidst remarks from several Federal Reserve officials indicating a lack of immediate need for interest rate cuts. Consequently, US bond yields, which have been a source of concern for stock performance lately, climbed following these comments. Specifically, the 10-year Treasury yield surged by 6 basis points, reaching levels near 4.64%.

Throughout the preceding trading week, there has been a notable reevaluation regarding the probability of Federal Reserve rate cuts and not just for 2024. This reconsideration stems from contemplations surrounding the Fed fund rate bottoming out much higher than expected, thus establishing a significantly higher implied floor for market discount rates. Such a shift serves as the cornerstone for the remainder of the yield curve, consequently providing a less optimistic platform for stock market performance.

To put this into more accurate context, The 10-year yield, presently hovering at approximately 4.64%, seems to be on a trend toward the 5% threshold. This trajectory mirrors that of the 2-year yield, which has already hugged the 5% mark, indicating a shifting sentiment among investors regarding longer-term rate adjustments. The fed fund’s strip now implies that the funds’ rate could stabilize within the 4% to 4.25% range, establishing a new implicit lower limit for market discount rates, upon which the remainder of the curve is predicated. Given this perspective, the prospect of the 10-year yield reaching 5% is well within the realm of possibility.

Amid the higher-for-longer narrative, Corporate earnings will now take center stage as investors scrutinize reports against lofty expectations. TSMC’s latest quarterly results provided a mixed picture: the Taiwanese semiconductor giant expressed caution regarding its growth prospects for the year outside of its memory chips business, leading to a more than 5% drop in its stock price. However, the company highlighted a voracious demand for AI while surpassing quarterly profit forecasts.

Attention now turns to Netflix, the inaugural megacap tech company set to disclose its earnings. Many view the streaming leader’s financial update on Thursday as a pivotal moment in the earnings season, particularly given the significant role megacap companies continue to play in propelling the markets upward.