Inflation is down. Is a Market Rally Coming?

Talking Equities is a weekly newsletter that provides information regarding equity analysis, investor spotlights, market conditions, and investing strategies. All information provided in Talking Equities should be considered an opinion and not a fact. All information should also be considered as strictly educational. While I would love to claim I have all the answers to cracking the stock market, I simply do not. Invest at your own discretion!

Optimus robots at the Tesla event trying to act like they aren’t planning to take over the world

Happy Tuesday Investors,

I don’t want to jinx us, but things have been looking really good in the market lately. The S&P 500 and DJIA both closed at new record highs, Bitcoin soared, earnings have been much higher than investors estimated, and inflation went down to 2.44%.

We have all of the characteristics of a bull market, and many companies last week and yesterday skyrocketed with the hopes that their earnings would be positively impacted by lower interest rates.

In this week’s newsletter, we will be diving into the possible outcomes related to the 76 companies releasing earnings reports over the next couple of days for the first time since the interest rate cuts in September. I’ve included a free downloadable earnings calendar to let you know when each company plans on debuting its report.

Another big talking point last week was the updated Consumer Price Index (CPI) which helps calculate the country’s inflation rate. Although CPI rose 0.2%, inflation still decreased to 2.44%. We’ll discuss what this means for the future of our economy and how it’s possible CPI can increase while inflation decreases.

The last major event that happened last week was the big unveiling of Tesla’s Cybertaxi, Robovan, and Optimus robot updates. This futuristic event showcased an impressive array of what Tesla will be working towards over the next couple of years.

Continue reading to learn why Tesla’s stock dropped 8.78% the day after this debut and if Tesla is at a good entry price to buy.

Let’s get into it.

Index metrics are weekly values and based on 10/11/2024 data.
Economic metrics vary depending on release schedule.
For metric definitions reference this newsletter.

The stock market had an eventful week filled with new record highs and economic information which is sure to continue to propel the U.S. economy upwards.

Since the Fed cut interest rates, investors have wondered if the U.S. economy will experience a soft landing or if we will be plunged into a recession. Recent stock market performance has been a good indicator that the Fed is on the right track to achieving this praised soft landing.

But why is this such a big deal?

Investors haven’t seen interest rate cuts in the last four years. Many speculated how long it would take to lower inflation, some theorizing that we would never see inflation rates around 2% again. Government authorities disputed whether or not the new inflation target should be 3%.

Luckily, we may be avoiding such a cataclysmic change. Last week new CPI (Consumer Price Index) numbers were released showing that there was a 0.18% increase. This is not a good sign for the consumer, as it means that consumer purchasing power went down and prices went up.

The good news is that while consumer purchasing power went down, so did inflation. U.S. inflation decreased by 3.56% last week reaching 2.44%. Pretty good considering what we’ve been dealing with the last four years. Some of you may be wondering how prices are increasing while inflation is decreasing.

It turns out that the inflation rate not only incorporates price changes but also the rate at which prices are changing. Because the CPI is rising at a slower rate, inflation went down. This goes to show that we still have a very sticky inflation problem and we still aren’t out of the weeds yet, but we are definitely on the right path.

Last week the S&P 500 and the Dow Jones Industrial Average (DJIA) hit all-time high records. The big surprise is that this wasn’t driven by big tech either.

We will discuss this further in this week’s newsletter, but investor optimism about the future of the economy and newly released company earnings that factor in lower interest rates are driving these positive gains.

If these trends continue, there will likely be many opportunities for the common investor to make money, especially if companies are experiencing higher-than-expected earnings and the market hits new highs.

76 companies are set to release their earnings this week for the first time since the interest rate cuts in September.

We’ve already seen what these earnings reports have done to a couple of company’s earnings last week.

Here are a few notable companies that exploded the day their earnings were released…

• JPMorgan Chase & Co. (JPM): +4.44%

• Wells Fargo & Co. (WFC): +5.61%

• BlackRock Inc. (BLK): +3.63%

Although these companies experienced large growth due to their actual earnings beating their estimated earnings, this is not always the case. The stock market is unpredictable, and even though a company beats its earnings it doesn’t mean that the stock will go up.

For example, earlier this year Meta (META) released their earnings along with a couple of updates regarding their AI endeavors. These updates were nothing to scoff at. They had successfully lowered the power needed to process certain queries and had made their AI open-source, (meaning other developers in the community can edit its source code for modifications). Not to mention, they also beat their earnings.

Any rational person would look at this and predict that the stock would go up. Unfortunately, the exact opposite happened.

The stock plummeted and experienced a huge downward gap. But how could this be? They beat their earnings! They released positive updates about their business endeavors which were surely to bode well for the future!

It turns out, that investors were not happy with how Meta had been spending its money on AI infrastructure. Meta’s capital expenditures had effectively doubled to sustain their AI operations and development. Meanwhile, no new revenue was coming in to keep their profit margin the same.

In the eyes of investors, this is a really big issue. Yes, investors care about the business operations and endeavors of the company they are allocating their money to. But most importantly, they care about the profitability of the company and the likelihood that it will continue to earn larger and larger earnings.

Take a look at Tesla (TSLA) for example. Elon Musk recently released some impressive news about what they have been working on over at Tesla. Last week, they debuted the first look at the Robovan and Cybertaxi. Not to mention, the Optimus robots also made an appearance, showing off their latest tech. It was truly an impressive show. Surely the stock went up the next day? Right?

Unfortunately, Tesla’s stock tumbled around 8% the next day. We’ll dive deeper into this later in the newsletter, but for now, you get the point. Greater earnings doesn’t always mean greater profits.

So what does all this mean and why am I telling you this? As I mentioned earlier, 76 companies will be releasing their earnings reports this week for the first time since interest rate cuts. It will be an amazing opportunity to see how these rate cuts have been affecting operations and could have a tremendous impact on the trading trend over the next couple of months.

That’s why I’ve provided a FREE earnings calendar below. I’ve included all 76 companies who are expected to release their earnings this week and have highlighted a few in green which I am particularly keeping my eye on.

Remember, just because earnings are positive does not mean that a stock is guaranteed to go up. These are educated bets based on predetermined analysis. You should always have a trailing stop loss behind any position that you make in order to protect you gains.

As mentioned previously in this week’s newsletter, Tesla’s (TSLA) stock dropped 8.78% last Friday after the debut of the Cybertaxi, Robovan, and Optimus updates.

It was truly a spectacular event. Elon Musk was brought to the stage in a Cybertaxi, (which by the way doesn’t have a steering wheel or gas pedals), Optimus robots were bartending and interacting with guests, and a Robovan arrived at the center of the event holding around 15 Tesla employees.

Come to think of it, I don’t think I have ever witnessed another event like it. It was truly one of a kind and made viewers feel as if they were living in the future. I thought, “Surely this is the turning point for Tesla and they will finally experience some positivity in the market”.

Then the stock dropped 8.78% the next day.

With all this in mind, I thought it would be beneficial to provide an in-depth analysis of Tesla so that we can decide whether or not this is a good buy opportunity.

Many online are talking about shorting Tesla. They believe that because the EV car manufacturer, robot developer, or whatever label you might add, has experienced consistent shortcomings, they are doomed for another bad quarter, (I don’t even know what to describe Tesla at this point. Elon describes his cars as robots with wheels).

Here is my hypothesis. The second that Tesla reports a positive quarter, the common investor will pour money into Tesla.

The current market price for Tesla is $217 after the stock dropped on Friday. To give you perspective on this, its 52-week high and low are $271 and $138 respectively. $217 is well above the $138 low, but there are some obvious support points holding Tesla’s trend that shouldn’t be ignored. Take a look at the graph below.

Look at how the prices above have been dancing around that blue line at $180.46. It initially broke upwards on April 29th, then danced around that same level until about early July when it skyrocketed. What’s important is how it came back down and bounced at the blue line once again.

What this shows is that there is an arbitrary line of support that investors have created in their heads. Even if the trend were to continue downward, there would need to be significantly negative news about Tesla to break below that blue line. The downward gap experienced on Friday may be a great entry point considering the stock has this level of support underneath it. Not to mention, it has already shown us that it can reach $271, even after continuous negative earnings.

But what do the fundamentals say?

One thing is certain, the company is abundant in innovation. Moreover, Elon’s management style is emulated among many other businesses around the world and has set a benchmark for how a successful company should be run.

While all of this is fine and dandy, one fact remains. Tesla has fallen short of its estimated earnings for the past four quarters. That doesn’t bode well for a business whose prime reason for existing is to make money.

The P/E ratio is a little tricky on this one. As I mentioned earlier, it’s hard to compare what Tesla is doing with other companies. Yes, they are a car manufacturer, but they also produce eerily life-like robots. No other car manufacturer is doing that, so it is difficult to compare its P/E ratio with another company’s.

The reality of Tesla missing its estimated earnings quarter after quarter is a real risk that should be considered before investing in the stock. As I mentioned previously, once Tesla releases a quarter where they beat their earnings (or even meet them) I believe investors will flock to this stock.

Until then, I believe that investing in this stock is a real gamble. We are looking at a company that is doing unprecedented things. I don’t believe many know the implications of what Tesla is fully developing right now. I do believe however that there is a real possibility that one day many will look back at this $217 value and say to themselves, “Why didn’t I buy 15 years ago when it was that low?”.

Not to mention, some of the greatest entrepreneurs of our time seem to be echoing the same message…

Never bet against Elon.

Chairman Powell be like…