Netflix & Tesla Earnings to Set the Tone for the Market

S&P 500 AND NASDAQ 100 WEEKLY FORECAST: SLIGHTLY BULLISH

Corporate earnings will be key for the U.S. stock market in the near term
Netflix and Tesla’s quarterly results will be in focus in the week ahead, following strong profitsfrom major banks in the last few days
If the tech sector performs well and issues positive guidance, there is scope for the S&P 500 and Nasdaq 100 to continue their recovery

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In recent months, a lot of pessimism has percolated through the marketon fears that red-hot inflation, stoked by surging energy prices and supply chain disruptions, will weigh on consumer sentiment and curtail economic growth. The anxiety has translated into investor caution, increased volatility, and moderate S&P 500 and Nasdaq 100 weakness, but it hadn’t yet led to a major correction as dip buyers have emerged at every opportunity to fuel a rebound and propel equities higher.

However, with third–quarter earnings season in full swing, dip buyers may be reluctant to step in in the event of a significant pullback, especially if U.S. companies underwhelm expectations and start issuing profit warnings left and right. Fortunately, this has not yet been the case; on the contrary, most firms that have reported results so far have surprised on the upside, with the big banks beating consensus by a wide margin and offering constructive guidance despite the various economic headwinds. Goldman Sachs, for example, crushed analysts’ forecasts handsomely, with profits jumping 63% and revenue climbing 26% year-on-year, thanks to record deal–making activity in its investment banking unit.

Sadly, financials account for only ~11% of the S&P 500, so before assessing the broad stock market outlook, traders should wait and see how the other sectors perform and what kind of guidance they offer when it is their turn to announce their results. Of particular interest should be the technology segment as it represents approximately 30% of the benchmark. That said, the spotlight will be on Netflix (NFLX) and Tesla (TSLA) in the week ahead, but perhaps more attention will be paid to the electric auto-marker, as its quarterly performance and outlook may offer clues about consumer spending on large discretionary items and the struggle manufacturers face in sourcing parts amid ongoing supply chain bottlenecks. The following table shows the earnings release date and the EPS forecasts for both NFLX and TSLA.

Source: Yahoo Finance

Focusing on Tesla, expectations are high following news that the company achieved an impressive record last quarter, with 241,300 cars delivered, 20,000 units more than analysts anticipated. The increased deliveries and capacity rampamid sustained demand for its vehicles, despite logistical challenges, suggest investors could be in for a bullish surprise on Wednesday. If so, market anxiety could begin to dissipate, paving the way for a moderate upside move in the S&P 500, but especially in the Nasdaq 100. On the other hand, if Tesla’s results disappoint and the manufacturer provides bleak guidance, sentiment could take a hit, dragging down big tech companies and triggering a sizable pullback in some of the tech-leaning equity indexes.