It's been a bad week for Tesla, Inc. (TSLA). The stock has always been a volatile one, but until the end of this week, there have always been enough bullish supporters to keep it afloat. That all changed in the aftermath of the company's earnings announcement this week.
Tesla missed revenue estimates by $640 million and Non-GAAP earnings estimates by $1.96 per share – coming in at $4.54 billion and a loss of $2.90 per share, respectively. The company has missed earnings estimates before, but this time seems to be different. Analysts and traders alike are losing confidence in Elon Musk's ability to sell the story that success is coming just over the next hill.
We're no longer only seeing supply-side issues – the company not being able to produce and deliver enough vehicles quickly enough – we're also seeing demand-side issues – not as many people are lining up to buy the Model S and the Model X.
To get a sense for how sentiment is shifting, look no farther than a comment from Dan Ives, an analyst at Wedbush who has been championing Tesla for years but recently downgraded the stock from a "Buy" to a "Neutral" rating. He said, "Musk & Co. in an episode out of the Twilight Zone act as if demand and profitability will magically return to the Tesla story."
You can see this bearish shift playing out on Tesla's stock chart. For the past two years, Tesla has been chaotically bouncing back and forth between support at around $242 and resistance at around $389. Today's bearish move ended that pattern as the stock broke through support and closed at $235.14 – its lowest level since Jan. 17, 2017.
If this bearish momentum continues, Tesla stock could quite easily find itself back down at $180 – its late 2016 support level.
The bulls won the battle heading into the weekend, pushing the S&P 500 up to its highest close price of all time at 2,939.88, which was also the index's high for the day. While the all-time intra-day high of 2,940.91 is still intact, today's bullish move tells us that traders are just looking for an excuse to push the S&P 500 to new record highs.
Ford Motor Company (F) was the big winner in the index with a gain of 10.74% on the day, as the company drove higher after smashing earnings expectations on the strength of increased sales of its high-margin commercial vehicles. It wasn't alone, though. A full 379 of the indexes 505 stocks closed in profitable territory today. Intel Corporation (INTC) was the index's biggest loser today with a loss of 8.99%.
Risk Indicators – Gross Domestic Product (GDP)
In the run-up to today's gross domestic product (GDP) announcement by the Bureau of Economic Analysis (BEA), analysts have been fretting that economic growth in Q1 2019 could be disappointing and that the stock market may pull back amid signs of weakness.
For instance, the economists that manage the Federal Reserve Board of Atlanta's GDPNow indicator originally started their growth estimates for the quarter at 0.3% because they were so pessimistic. Ultimately, they raised their estimates to 2.7% as more economic data was released during the quarter, but even that was too low.
We learned today that fears about GDP were unfounded. The U.S. economy grew at the surprisingly high annualized rate of 3.2% during Q1 2019. Only Q2 and Q3 of 2018 have been stronger since GDP hit its recent low in Q4 2015. Strong economic growth, coupled with surprisingly low levels of inflation – the GDP price index came in at a paltry 0.9% – could be the ideal scenario for a move higher in the stock market.
On one hand, the stronger the economy is, the more consumers are going to spend and the more revenue companies are going to rake in. On the other hand, the lower inflation remains, the less likely it is that the Fed is going to raise interest rates and the cheaper it will be for companies to borrow money for business expansion or continued share buyback programs. When you put these two factors together, you have a perfect recipe for higher earnings per share (EPS) and higher stock prices.
Bottom Line - Market Not Floating All Boats
This earnings season has highlighted the shift Wall Street is making from allowing "a rising tide to float all boats" to a more critical approach that requires each company to prove its worth and live or die by those efforts.
In the past, a strong GDP number like we saw today would have caused traders to be more lenient in their expectations for a stock like Tesla. But in today's environment, Tesla is dropping because the company hasn't demonstrated the growth and strength traders are looking for so it's being punished.
As difficult as the price cuts can be for the stocks that don't meet expectations, this market environment is actually quite healthy because you know deserving stocks are going to be rewarded.
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