CNBC Daily Open: Expectations can matter more than numbers

This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

Cautious rise
U.S. stocks edged up slightly Wednesday as traders digested earnings reports, with Tesla, Netflix and IBM reporting after the bell. Europe’s Stoxx 600 Index added 0.3% as oil and gas stocks rose 1.1%. The U.K.’s FTSE 100 had a much better day, advancing 1.8% after the country’s inflation figures came in cooler than expected. More on those stories below.

Tesla’s record revenue
Tesla booked record revenue of $24.93 billion, a quarter-on-quarter increase of almost 7% thanks to price cuts. However, that meant operating margin dropped to 9.6%, the lowest for the last five quarters. Still, net income increased 20% from last year to $2.7 billion. Both profit and revenue beat Wall Street’s expectations. Shares sank 4.5% in extended trading.

Netflix’s crackdown worked
Netflix’s second-quarter revenue rose 3% to $8.19 billion from a year earlier and net income increased 3.47% to $1.49 billion. Subscribers jumped 5.9 million last quarter as Netflix stopped password sharing. Netflix also removed its cheapest ad-free plan in the U.S. and U.K. Its shares plunged 8.66% in after-hours trading, but that’s a sign investors are selling shares to lock in profits, CNBC’s Alex Sherman wrote.

Not all that is Goldman glitters
Goldman Sachs’ profit fell 58% to $1.22 billion, or $3.08 a share, missing estimates. Goldman’s decline in trading and losses related to GreenSky sapped around $3.95 from per share earnings. Revenue fell 8% to $10.9 billion, marginally beating expectations.

Some relief in the UK
U.K. inflation in June cooled to 7.9% year over year, below economists’ projection of 8.2%. May’s consumer price index reading was 8.7%, so that’s a significant drop in the rate of price increases. On a monthly basis, prices increased by only 0.1%. The yield on the two-year U.K. government bond plunged 20 basis points on the news.

[PRO] The Dow Theory
The Dow Jones Industrial Average has a lesser-known sibling: the Dow Jones Transportation Average. Both indexes recently closed at a 52-week high, in a sign the rally is broadening. CNBC Pro’s Bob Pisani explains the “Dow Theory” and why it might matter to traders.

It’s all about expectations.

Prior to the start of the second-quarter earnings season, investor relations departments and analysts massaged expectations downwards. The most obvious example is Goldman Sachs — its woes in consumer banking, from its attempt to sell GreenSky to its talks to offload its Apple credit card and savings account products, were well publicized.

When Goldman reported a disappointing second quarter, then, it didn’t take investors aback. Its shares even rose almost 1% on the news. Astounding, if you think about the bank’s 58% fall in profits. But not that surprising, given that investors were prepared and were probably heaving a sigh of relief there wasn’t more bad news.

Elsewhere, the strategy of managing expectations seems to be working. More than three quarters of S&P companies that have reported results have exceeded expectations, according to FactSet data. That reinforced hopes that the economy can elude a recession as inflation falls and rates remain high.

Major indexes eked out small gains on that sentiment. The Dow Jones Industrial Average rose 0.31%, its eighth straight day of gains and longest winning streak since September 2019. The Nasdaq Composite was essentially flat and the S&P 500 climbed 0.24%.

Thus far in July, the S&P has added 2.6%. By contrast, the small-cap Russell 2000 Index has risen almost 5% in the same period, CNBC’s Darla Mercado and Gina Francolla noted. It’s a sign that more firms are participating in the market rally, potentially giving stocks more room to grow.

Tom De Luca, senior researcher at Vanguard, concurs. “Investors are saying loud and clear that they expect the current stock market rally to continue,” said De Luca. “Right now, short-term optimism is higher than we’ve seen since December 2021, right before the start of the 2022 bear market.”