Tag: Stock markets

‘Too few college-educated men’: A look at why many women undergo egg freezing, and the costs associated with it

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Lynn Curry, nurse practitioner for Huntsville Reproductive Medicine, P.C., lifts frozen embryos out of IVF cryopreservation dewar, in Madison, Alabama, U.S., March 4, 2024. 

Roselle Chen | Reuters

As legal battles over reproductive rights increase across the U.S., one area that could be impacted is egg freezing.

In February, the Alabama state Supreme Court ruled that all embryos created through in vitro fertilization are considered children. This ruling could have far-reaching ramifications of civil and criminal liabilities for fertility clinics and their patients. Over 1 million frozen eggs and embryos are stored in the United States alone, according to biotech fertility company TMRW Life Sciences.

Women who choose to undergo reproductive technology procedures such as egg freezing face a long road riddled with obstacles. Here’s a look into the driving forces behind egg freezing and the financial, social and emotional costs that come with it — based on personal experiences from women across the country.

The ‘mating gap’: What’s driving egg freezing

There’s a notion that most women delaying motherhood are doing so to focus on other aspects of their lives, such as their careers. That’s not so much the case anymore, according to Marcia Inhorn, a professor specializing in medical anthropology at Yale University.

“The majority of women who freeze their eggs are doing it because they have not found a partner. I call that the mating gap — the lack of eligible, educated, equal partners,” Inhorn, who last year authored the book “Motherhood on Ice: The Mating Gap and Why Women Freeze Their Eggs,” told CNBC.

This problem stems from the fact that today, women are receiving higher education at greater rates than men. Inhorn noted that women are outperforming men in higher education in 60% of countries, and that in the United States alone there are 27% more women than men in higher education.

“The result is that, for women who are highly educated in America and of reproductive age — between 20 and 39 — there literally are millions too few college-educated men,” Inhorn added.

Another reason women freeze their eggs is the sense of empowerment the procedure brings them. Fundamentally, Inhorn believes that this freedom that egg freezing allows is what ultimately draws increasingly younger women to the procedure.

“It gives you a little reprieve, a little extra time,” she said.

This statement is one that reproductive endocrinologists and fertility specialists Drs. Nicole Noyes and Aimee Eyvazzadeh agree with.

Noyes, who has worked in the fertility industry since 2004 and is based in New York, has seen a noticeable shift in her patients’ ages and attitudes in the last two decades. In the beginning, her patients tended to be older, in their early 40s and viewed egg freezing as a last-ditch procedure as they hedged the end of their reproductive lives. Now, women as young as their late 20s come in to see Noyes.

Eyvazzadeh, who has also worked in the field for 20 years and lives in California, has noticed a trend towards younger patients who are choosing to freeze their eggs while they’re at their most viable.

This is the case for social media influencer Serena Kerrigan, who just recently turned 30. Despite being in a relationship, egg freezing was a procedure she willingly undertook while focusing on growing her business, she told CNBC.

Kerrigan, who has more than 800,000 followers between her Instagram and TikTok and is based in New York, began sharing her egg freezing journey last year. She wanted to remove some of the stigma around egg freezing and give her followers an inside look at the arduous process.

Kerrigan has paid for all her procedures on her own, she told CNBC, and recently partnered with her clinic, Spring Fertility, to donate a round of egg freezing to one of her followers. Eventually, she hopes egg freezing can be less stigmatized.

“There’s a layer of shame or taboo that I actually don’t understand. To me, this is science, and this is incredible, and this is a huge advancement,” she said. “This is a way of putting the power back into women and having control of their lives.”

The benefits are high, but so are the costs

While the benefits of egg freezing are certainly enormous, so too are the associated costs.

The average price for a single egg freezing cycle in the U.S. clocks in at $11,000. Many women need multiple egg freezing cycles, especially as they grow older and egg number and quality begin to deteriorate. That’s not to mention additional charges like hormone medication and yearly storage fees, which could respectively clock in at around $5,000 and $2,000.

Nutrition health coach Jenny Hayes Edwards froze her eggs in 2010 at 34 years old and was one of the first women in the U.S. to undergo the procedure. Despite it still being labeled an “experimental” procedure in the U.S., Hayes Edwards was certain she wanted to try. She wasn’t dating anybody at the time and was “working like crazy” while running her restaurant businesses in Colorado.

But high costs were her number one obstacle. Her restaurants had taken a hit after the 2008 financial collapse, when many consumers began foregoing their expensive ski vacations in Colorado.

Hayes Edwards remembers it being a tough decision to make. But her mother eventually helped sway her in favor of the procedure.

“It’s just money, and the opportunity that you might be missing is so much bigger,” Hayes Edwards recalled her mother saying. “I was so grateful that she pushed me over the edge.”

She was able to scrape together the $15,000 needed through maxing out a credit card, selling some jewelry and liquidating a bond in her inheritance.

Hayes Edwards now has a healthy three-year-old daughter, conceived nearly a decade after she froze her eggs, and is still appreciative for the extra time egg freezing bought her to meet her now-husband.

Employer benefits

In recent years, egg freezing, fertility and family planning services have increasingly popped up as employer benefits, especially among technology companies. A 2021 study from Mercer showed 42% of large companies — those with at least 20,000 employees — covered in vitro fertilization services in 2020, up from 36% in 2015. Nineteen-percent of these companies had egg freezing benefits, more than triple the 6% offering these benefits in 2015.

Michelle Parsons decided to freeze her eggs since the procedure was offered through her job. The various tech companies Parsons has worked for have offered anywhere between $10,000 to $75,000 in fertility benefits.

Parsons, who is a lesbian, had always known that she wanted to freeze her eggs — and undertook the procedure while working at Match Group as chief product officer of dating app Hinge. At the time, neither she nor her ex-partner were ready to have children, but it was one financial incentive Parsons didn’t want to miss out on.

Besides eggs, Parsons also chose to freeze her successfully fertilized embryos as another backup. Frozen embryos have a much higher likelihood of viable thawing. In fact, Parsons’ search for a sperm donor sparked one of the most-used features on the Hinge app — voice prompts.

“When we started to listen to all of these voice recordings of potential sperm donors, the lightbulb went off in my head and I was like, wow, this is what’s missing from dating right now,” Parsons told CNBC. “Because voice gives you so much nuance into personality, humor, vibe … we ended up building that feature called voice prompts on Hinge and it was a huge, wild success that led to rapid growth for Hinge and it became viral on TikTok.”

Still, Parsons noticed egg freezing taking a toll on her professional and personal life in other ways.

“You have to inject yourself with hormones for two weeks. You have to eat differently. You don’t really want to be in social settings. You can’t drink. There are all these other ramifications around just going through that process, even though we know it’ll be for this one month and then it’ll be over,” she said.

The process also doesn’t guarantee success.

Evelyn Gosnell underwent her first egg retrieval when she was 32, following by two additional cycles at 36 and 38 years old. By the time she was ready to have children with her now-partner, the New York-based behavioral scientist had many frozen eggs ready. But, she received no viable and normal embryos after her eggs had been thawed and fertilized.

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Influencer Tori Dunlap is spurring women to maximize their savings and invest in the stock market

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As Tiffany Mane read a personal finance book during her train ride to work, a woman sitting near her acknowledged that she, too, knew of the author. Shortly after, several bystanders began inquiring into its contents.

Mane was reading “Financial Feminist” by Tori Dunlap. The late-2022 release is one piece of the Her First $100K empire, a money-focused education platform targeted at women and other marginalized groups.

That commuting experience highlights the growing community built around Dunlap’s wisdom. And there’s a cyclical effect at play: Women utilize Dunlap’s resources to improve their financial lives, and then share the information with others.

“It really has changed my life,” said Mane, a 35-year-old human rights investigator in the Washington, D.C., area. “I realized there are so many women who don’t know this stuff and who don’t have the resources.”

Finance has historically been viewed as a man’s responsibility, creating a disparity within personal economics. New York Life found the average woman saved less than half a man did in 2022. A 2021 survey from NerdWallet showed women were less likely to be invested in the stock market than their male counterparts.

But Dunlap and her growing fanbase are looking to change that.

Dunlap herself rose to prominence by sharing her journey to save $100,000 by 25 years old. She was inspired to document this goal after finding that many existing resources didn’t adequately take into account the unique experiences of marginalized groups.

In Dunlap’s words, a lot of what was out there felt “bro-y” and out of touch with a young woman’s experience. She said society has largely characterized spending by women as “frivolous,” creating a critical culture for those seeking relatable financial advice.

“People want to feel seen and they want to feel heard,” Dunlap said. “This kind of identity-focused personal finance is 100% necessary, and is the future of personal finance.”

‘Finance is personal’

What began as a side hustle on top of a marketing job has grown to a multi-platform product since Dunlap took the leap to run Her First $100K full time in 2019. Her “Financial Feminist” book sold more than 150,000 copies in its first year in print. Dunlap’s podcast of the same name, which typically has one full and one mini episode out per week, touches on topics such as homeownership and recession planning.

Both the Instagram and TikTok accounts for Her First $100K have amassed at least 2 million followers. A Facebook group named after the book has swelled to more than 100,000 members, where Mane and others converse about issues that impact their money and careers.

In that group, members share financial wins and trade advice on topics like which banks or credit cards to use. Some ask anonymous questions as they venture into sensitive subjects such as debt or the economic reality of divorce. Members have also organized virtual book clubs with others in the group to continue the conversation.

Dunlap said she isn’t surprised that the space has become meaningful to members in a society where women are unfairly criticized for their financial choices. She’s also been proud to see a culture free of judgment or shame as participants offer one another validation and feedback.

Tori Dunlap teaching a money workshop.

Courtesy Karya Schanilec

Fans said they appreciate Dunlap’s two-fold approach to financial education. She offers actionable steps to improve their economic lives, they say, while also being cognizant of systematic barriers that make it harder for women and other marginalized groups to build wealth.

Specialized advice can benefit women, as research shows they have less confidence in topics tied to money than men, according to Annamaria Lusardi, senior fellow at the Stanford Institute for Economic Policy Research.

These niche resources would better resonate because they can touch on topics or examples that are disproportionately relevant to the specific population, said Lusardi, who is also founder of the Global Financial Literacy Excellence Center. For women, she said one area of emphasis could be on the economics of having or raising children.

“Finance is personal,” Lusardi said. “As a woman, I feel like I have different needs, have different circumstances. And so I want things more targeted to me.”

A ‘sisterhood’

For those who have engaged with Dunlap’s work and the virtual community, they’ve seen how the advice has changed their financial lives – and now feel inspired to pay it forward. In the words of Mane, the Facebook group feels like being part of a “sisterhood.”

Through Dunlap’s advice and subsequent research, Mane has implemented a plan for budgeting and opened a high-yield savings account. She also opened a Roth individual retirement account, which grows free of taxes, and she is beginning Dunlap’s educational program focused on investing called Stock Market School.

As a result, Mane, a child of immigrants who grew up below the poverty line, said she’s never felt so economically stable. Her upcoming wedding will be paid for in cash, a financial milestone she never thought would be possible.

Mane has gifted the book to several women in her life. The human rights investigator has a copy in her office for curious colleagues, often explaining what it is and has meant to her. Beyond the Facebook group, she’s started passing down tidbits of wisdom to her nieces.

Thousands of miles away, Tierney Barker is seeing parallel effects. The 32-year-old Canadian first found Her First $100K’s resources on budget tracking and debt consolidation.

One of the travel agent’s first big changes was implementing a savings “bucket” strategy — in which money is earmarked for living expenses, goals and fun. Barker has also been finding time to review her finances on a regular basis. Similar to Mane, she opened the Canadian equivalent of a high-yield savings account.

After seeing the impact on her own life, Barker recommended the book to others and requested its addition to her local library in British Columbia. Barker also found herself better equipped to discuss money with other women, something that once felt like a taboo topic that should be mostly reserved for men.

“It’s been easier to talk about it and to be open about it,” Barker said, adding that having the resources is “empowering.”

While Dunlap has been proud to see individuals benefiting from this advice and sharing it with others, she thinks that the work isn’t done.

She said the systematic barriers that disproportionately hurt women and minorities in the business world remain. After the Supreme Court’s decision to overturn Roe v. Wade, Dunlap said it’s more important than ever to push for social equity — including through economics and finance.

“I don’t believe we have any sort of equality for any marginalized group until we have financial equality,” she said. “A financial education is our best form of protest as women.”

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#Influencer #Tori #Dunlap #spurring #women #maximize #savings #invest #stock #market

Here’s why investors should stop worrying so much about concentration risk in the market

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After a brief respite, the Magnificent 7 stocks have again hit new highs on the heels of Nvidia’s blowout earnings: They now again comprise about 30% of the S&P 500. Throw in the remainder of the top 10 stocks (Berkshire Hathaway, Lilly, and Broadcom) and the concentration rises to about 33% of the S&P 500.

At the recent ETF conference in Miami Beach, Registered investment advisors were eager for advice on how they might get their clients to stop pestering them to invest more money in the Magnificent 7.

There was much handwringing about the dangers of over-concentration. RIAs worried that just like they get blamed for not being in the Mag 7 rally with sufficient zest, they will get clobbered by clients blaming them when (and if) they bubble bursts.

The hope of the RIAs was the market rally would broaden out.

Fat chance. That was two weeks ago, during a brief lull in the relentless march of Nvidia and the Magnificent 7.

But Nvidia’s earnings have killed the last hope of the “diversify” crowd. The numbers speak for themselves:

Major Sectors YTD

Van Eck Semiconductor ETF (SMH) up 20% (25% Nvidia!)

Roundhill Magnificent 7 ETF (MAGS) up 14% (14% Nvidia!)

S&P 500 up 5% (4% Nvidia!)

S&P 500 Equal-Weight ETF (RSP) up 2%

Is over-concentration really a risk?

On the surface, it sure seems that way. The comparisons are getting silly.

At the ETF conference, Dimensional Fund Advisors noted that the Magnificent 7 stocks were now just as large as the entire combined stock markets of Japan, UK, Canada, France, Hong Kong/China combined:

Magnificent 7 vs. The World

(MSCI All Country World Index weighting)

Entire U.S. stock market: 63%

Japan, UK, Canada, France, Hong Kong/China combined: 17.5%

Magnificent 7: 17%

Source: Dimensional Funds

That seems crazy, no? And yet, it’s not at all unusual to see concentration like this in prior periods. And it’s mostly around tech.

High concentration levels have happened often

It’s true concentration has risen in the last 10 years. As late as 2015, the top 10 stocks in the S&P 500 were only 17.8% of the index, according to a 2023 study by FS Investments.

But that was a low point. Most of the time, the concentration of the top 10 stocks has been far higher.

For example, in the mid-1960s the concentration of the top 10 was over 40% of the S&P 500.

The domination of the so-called “Nifty 50” stocks (which included IBM, American Express, General Electric, Polaroid and Xerox) in the 1960s and early 1970s regularly kept the concentration of the top 10 stocks over 30%.

It slowly declined over the next 20 years, settling between roughly 17% and 20% of the market capitalization of the S&P 500 between the 1980s and the late 1990s.

It shot up again during the dotcom and Internet boom, which again pushed the concentration of the top 10 to over 25% in the late 1990s.

It’s not just a U.S. issue

Other countries like China, France, and Germany have far higher concentration in the top 10 names than the U.S.

The broadest China ETF, the iShares MSCI China ETF (MCHI) has over 600 stocks. But the top 10 stocks, which include Tencent, Alibaba and Baidu, comprise 42% of the entire ETF.

Same with Germany: The iShares MSCI Germany ETF (EWG) has 57% of its weighting in 10 stocks, with 22% in just two stocks, SAP and Siemens.

Same with the United Kingdom: The iShares MSCI UK (EWU) has 50% in the top 10 holdings, with nearly a quarter in three stocks, Shell, AstraZeneca, and HSBC.

Same with France: The iShares MSCI France (EWQ) has 57% in the top 10 with just two companies — LVMH and Total — comprising 20% of the weighting.

And same with Canada: The iShares S&P/TSX 60 Index (XIU) has 45% in the top 10 holdings.

Concentration of top 10 stocks in country indexes

China 42%

Germany 57%

UK: 50%

France: 57%

Canada 45%

U.S.: 33%

Concentration has helped U.S. and index investors

You may worry about it, but concentration has been a boon to index investors and to U.S. investors in general.

We all know the majority of the gains in the last year can be attributed to a small number of mostly tech stocks. Investors who own the S&P 500 don’t have to pick those winners; they just go along for the ride.

Second, U.S. stocks are global market leaders, and when a small group becomes market leaders it almost always means the U.S. stock market outperforms the world.

That is exactly what has happened. The U.S. stock market, which was roughly 40% of the global market capitalization a short while ago, is now roughly 50% of global market capitalization.

U.S. investors in broadly diversified indexes have been richly rewarded for their “concentration risk.”

Sit back and relax a little

Here’s what it all means: Concentration is a characteristic of market cap-weighted indexes. These indexes reward the winners and penalize the losers.

The reason the Magnificent 7 has done so well is that these are the most profitable companies in the world. They are at the cutting edge of transformative technologies, particularly AI.

That’s the primary reason they are the leaders. There are also secondary reasons: globalization, which made supply chains more efficient, and the long decline in interest rates (which has come to an end).

But the bottom line is that in an era where growth has been hard to come by, these companies have plenty of it. And investors are willing to pay up.

What about comparisons to the dot-com era? The stocks at the top contribute a far greater amount to the earnings of the S&P 500 than they did in the 1990s. And the cash flow is much higher.

There’s already been a correction: It was called 2022

At the ETF conference, the big worry among the RIAs was, “But what if there’s a big correction in the Magnificent 7?”

Uh, sorry, but they already corrected. Nvidia went from roughly $292 at the start of 2022 to $112 by October of that year, a drop of 62%. The other Magnificent 7 stocks all had big drops then.

Of course they could all correct again. But the AI revolution is very real.

Nvidia’s sales tripled. Profits were up 800%. That is a very real revolution.

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China’s VC playbook is undergoing a sea change as U.S. IPO exits get tougher

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A bank employee count China’s renminbi (RMB) or yuan notes next to U.S. dollar notes at a Kasikornbank in Bangkok, Thailand, January 26, 2023.

Athit Perawongmetha | Reuters

BEIJING — Venture capitalists in China that once rose to fame with giant U.S. IPOs of consumer companies are under pressure to drastically change their strategy.

The urgency to adapt their playbook to a newer environment has increased in the last few years with stricter regulations in China as well as the U.S., tensions between the two countries and slowdown in the world’s second-largest economy.

Here are the three shifts that are underway:

1. From U.S. dollars to Chinese yuan

The business model for well-known venture capital funds in China such as Sequoia and Hillhouse typically involved raising dollars from university endowments, pension funds and other sources in the U.S. — known in the industry as limited partners.

That money then went into startups in China, which eventually sought initial public offerings in the U.S., generating returns for investors.

Now many of those limited partners have paused investing in China, as Washington increases its scrutiny of U.S. money backing advanced Chinese tech and it gets harder for Chinese companies to list in the U.S. A slowdown in the Asian country has further dampened investor sentiment.

That means venture capitalists in China need to look to alternative sources, such as the Middle East, or, increasingly, funds tied to local government coffers. The shift toward domestic channels also means a change in currency.

In 2023, the total venture capital funds raised in China dropped to their lowest since 2015, with the share of U.S. dollars falling to 5.3% from 8.4% in the prior year, according to Xiniu Data, an industry research firm.

That’s far less than in the previous years — the share of U.S. dollars in total VC funds raised was around 15% for the years 2018 to 2021, the data showed. The remaining share was in Chinese yuan.

Currently, many USD funds are shifting their focus to government-backed hard tech companies, which typically aim for A share exits rather than U.S. listings

For foreign investors, high U.S. interest rates and the relative attractiveness of markets such as India and Japan also factor into decisions around whether to invest in China.

“VCs have definitely changed their view on Greater China from a couple years ago,” Kyle Stanford, lead VC analyst at Pitchbook, said in an email.

“Greater China private markets still have a lot of capital available, whether it be from local funds, or from areas such as the Middle East, but in general the view on China growth and VC returns has changed,” he said.

2. China investments, China exits

Washington and Beijing in 2022 resolved a long-standing audit dispute that reduced the risk of Chinese companies having to delist from U.S. stock exchanges.

But following the fallout over Chinese ride-hailing giant Didi’s U.S. listing in the summer of 2021, the two countries have increased scrutiny of China-based companies wanting to go public in New York.

Beijing now requires companies with large amounts of user data — essentially any internet-based consumer-facing business in China — to receive approval from the cybersecurity regulator, among other measures, before they can list in Hong Kong or the U.S.

Washington has also tightened restrictions on American money going into high-tech Chinese companies. A few large VCs have separated their China operations from those in the U.S. under new names. Last year, Sequoia most famously rebranded in China as HongShan.

“USD funds in China can still invest in non-sensitive sectors for A share IPOs, but have the challenge of local enterprise preferring capital from RMB [Chinese yuan] funds,” said Liao Ming, founding partner of Beijing-based Prospect Avenue Capital, which has focused on U.S. dollar funds.

Stocks listed in the mainland Chinese market are known as A shares.

“The trend is shifting towards investing in parallel entity overseas assets, marking a strategic move ‘from long China to long Chinese,” he said.

“With U.S. IPOs no longer being a viable exit strategy for China assets, investors should target local exits in their respective capital markets—in other words, China exits for China assets, and U.S. exits for overseas assets,” Liao said.

Read more about China from CNBC Pro

Only a handful of China-based companies – and barely any large ones – have listed in the U.S. since Didi’s IPO. The company went public on the New York Stock Exchange in the summer of 2021, despite reported regulatory concerns.

Beijing promptly ordered an investigation that forced Didi to temporarily suspend new user registrations and app downloads. The company delisted later that year.

The probe, which has since ended, came alongside Beijing’s crackdown on alleged monopolistic practices by internet tech companies such as Alibaba. The clampdown also covered after-school tutoring, minors’ access to video games and real estate developers’ high reliance on debt for growth.

3. VC-government alignment, larger deals

Instead of consumer-facing sectors, Chinese authorities have emphasized support for industrial development, such as high-end manufacturing and renewable energy.

“Currently, many USD funds are shifting their focus to government-backed hard tech companies, which typically aim for A share exits rather than U.S. listings,” Liao said, noting that it aligns with Beijing’s preferences as well.

These companies include developers of new materials for renewable energy and factory automation components.

In 2023, the 20 largest VC deals for China-headquartered companies were mostly in manufacturing and included no e-commerce business, according to PitchBook data. In pre-pandemic 2019, the top deals included a few online shopping or internet-based consumer product companies, and some electric car start-ups.

The change is even more stark when compared with the boom around the time online shopping giant Alibaba went public in 2014. The 20 largest VC deals for China-headquartered companies in 2013 were predominantly in e-commerce and software services, according to PitchBook data.

… the venture capital scene has become even more state-concentrated and focused on government priorities.

Camille Boullenois

Rhodium Group

The shift away from internet apps towards hard tech requires more capital.

The median deal size in 2013 among those 20 largest China VC transactions was $80 million, according to CNBC calculations based off PitchBook data.

That’s far smaller than the median deal size of $280 million in 2019, and a fraction of the median of $804 million per transaction in 2023 for the same category of investments, the analysis showed.

Many of those deals were led by local government-backed funds or state-owned companies, in contrast to a decade earlier when VC names such as GGV Capital and internet tech companies were more prominent investors, according to the data.

“In the past 20 years, China and finance developed very quickly, and in the past ten years private [capital] funds grew very quickly, meaning just investing in any industry would [generate] returns,” Yang Luxia, partner and general manager at Heying Capital, said in Mandarin, translated by CNBC. She has been focused on yuan funds, while looking to raise capital from overseas.

Yang doesn’t expect the same pace of growth going forward, and said she is even taking a “conservative” approach to new energy. The technology changes quickly, making it hard to select winners, she said, while companies now need to consider buyouts and other alternatives to IPOs.

Then there’s the question of China’s growth itself, especially as state-linked funds and policies play a larger role in tech investment.

“In 2022, [private equity and venture capital] investment in China was cut in half, and it fell again in 2023. Private and foreign actors were the first to withdraw, so the venture capital scene has become even more state-concentrated and focused on government priorities,” said Camille Boullenois, associate director, Rhodium Group.

The risk is that science and technology becomes “more state-directed and aligned with government’s priorities,” she said. “That could be effective in the short term, but is unlikely to encourage a thriving innovation environment in the long term.”

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Friday’s S&P 500 and Nasdaq-100 rebalance may reflect concerns over concentration risk

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It’s arguably the biggest stock story of 2023: a small number of giant technology companies now make up a very large part of big indexes like the S&P 500 and the Nasdaq-100. 

Five companies (Apple, Microsoft, Amazon, Nvidia and Alphabet) make up about 25% of the S&P 500. Six companies (Apple, Microsoft, Amazon, Nvidia, Alphabet and Broadcom) make up about 40% of the Nasdaq-100. 

The S&P 500 and the Nasdaq are rebalancing their respective indexes this Friday. While this is a routine event, some of the changes may reflect the concerns over concentration risk. 

A ton of money is pegged to a few indexes 

Now that the CPI and the Fed meeting are out of the way, these rebalances are the last major “liquidity events” of the year, corresponding with another notable trading event: triple witching, or the quarterly expiration of stock options, index options and index futures. 

This is an opportunity for the trading community to move large blocks of stock for the last gasps of tax loss harvesting or to position for the new year. Trading volume will typically drop 30%-40% in the final two weeks of the year after triple witching, with only the final trading day showing significant volume.

All of this might appear of only academic interest, but the big move to passive index investing in the past 20 years has made these events more important to investors. 

When these indexes are adjusted, either because of additions or deletions, or because share counts change, or because the weightings are changed to reduce the influence of the largest companies, it means a lot of money moves in and out of mutual funds and ETFs that are directly or indirectly tied to the indexes. 

Standard & Poor’s estimates that nearly $13 trillion is directly or indirectly indexed to the S&P 500. The three largest ETFs (SPDR S&P 500 ETF Trust, iShares Core S&P 500 ETF, and Vanguard S&P 500 ETF) are all directly indexed to the S&P 500 and collectively have nearly $1.2 trillion in assets under management. 

Linked to the Nasdaq-100 — the 100 largest nonfinancial companies listed on Nasdaq — the Invesco QQQ Trust (QQQ) is the fifth-largest ETF, with roughly $220 billion in assets under management. 

S&P 500: Apple and others will be for sale. Uber going in 

For the S&P 500, Standard & Poor’s will adjust the weighting of each stock to account for changes in share count. Share counts typically change because many companies have large buyback programs that reduce share count. 

This quarter, Apple, Alphabet, Comcast, Exxon Mobil, Visa and Marathon Petroleum will all see their share counts reduced, so funds indexed to the S&P will have to reduce their weighting. 

S&P 500: Companies with share count reduction

(% of share count reduction)

  • Apple        0.5%
  • Alphabet   1.3%
  • Comcast    2.4%
  • Exxon Mobil  1.0%
  • Visa                0.8%
  • Marathon Petroleum  2.6%

Source: S&P Global

Other companies (Nasdaq, EQT, and Amazon among them) will see their share counts increased, so funds indexed to the S&P 500 will have to increase their weighting. 

In addition, three companies are being added to the S&P 500: Uber, Jabil, and Builders FirstSource.  I wrote about the effect that being added to the S&P was having on Uber‘s stock price last week.  

Three other companies are being deleted and will go from the S&P 500 to the S&P SmallCap 600 index: Sealed Air, Alaska Air and SolarEdge Technologies. 

Nasdaq-100 changes: DoorDash, MongoDB, Splunk are in 

The Nasdaq-100 is rebalanced four times a year; however, the annual reconstitution, where stocks are added or deleted, happens only in December. 

Last Friday, Nasdaq announced that six companies would be added to the Nasdaq-100: CDW Corporation (CDW), Coca-Cola Europacific Partners (CCEP), DoorDash (DASH), MongoDB (MDB), Roper Technologies (ROP), and Splunk (SPLK). 

Six others will be deleted: Align Technology (ALGN), eBay (EBAY), Enphase Energy (ENPH), JD.com (JD), Lucid Group (LCID), and Zoom Video Communications (ZM).

Concentration risk: The rules

Under federal law, a diversified investment fund (mutual funds, exchange-traded funds), even if it just mimics an index like the S&P 500, has to satisfy certain diversification requirements. This includes requirements that: 1) no single issuer can account for more than 25% of the total assets of the portfolio, and 2) securities that represent more than 5% of the total assets cannot exceed 50% of the total portfolio. 

Most of the major indexes have similar requirements in their rules. 

For example, there are 11 S&P sector indexes that are the underlying indexes for widely traded ETFs such as the Technology Select SPDR ETF (XLK). The rules for these sector indexes are similar to the rules on diversification requirements for investment funds discussed above. For example, the S&P sector indexes say that a single stock cannot exceed 24% of the float-adjusted market capitalization of that sector index and that the sum of the companies with weights greater than 4.8% cannot exceed 50% of the total index weight. 

At the end of last week, three companies had weights greater than 4.8% in the Technology Select Sector (Microsoft at 23.5%, Apple at 22.8%, and Broadcom at 4.9%) and their combined market weight was 51.2%, so if those same prices hold at the close on Friday, there should be a small reduction in Apple and Microsoft in that index. 

S&P will announce if there are changes in the sector indexes after the close on Friday. 

The Nasdaq-100 also uses a “modified” market-capitalization weighting scheme, which can constrain the size of the weighting for any given stock to address overconcentration risk. This rebalancing may reduce the weighting in some of the largest stocks, including Apple, Microsoft, Amazon, Nvidia and Alphabet. 

The move up in these large tech stocks was so rapid in the first half of the year that Nasdaq took the unusual step of initiating a special rebalance in the Nasdaq-100 in July to address the overconcentration of the biggest names. As a result, Microsoft, Apple, Nvidia, Amazon and Tesla all saw their weightings reduced. 

Market concentration is nothing new

Whether the rules around market concentration should be tightened is open for debate, but the issue has been around for decades.

For example, Phil Mackintosh and Robert Jankiewicz from Nasdaq recently noted that the weight of the five largest companies in the S&P 500 was also around 25% back in the 1970s.

Disclosure: Comcast is the corporate parent of NBCUniversal and CNBC.

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The IPO market has grown quiet again. Here’s what is behind the shift in sentiment

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Traders working at the New York Stock Exchange (NYSE), on Sept. 20th, 2023.

NYSE

It’s quiet out there in IPO land — very quiet.

This is it: the weeks before Thanksgiving usually bring a spate of large IPOs eager to go public before the holiday season starts.

“Whatever you are going to get between now and the end of the year should be happening right now,” Don Short, head of venture equity at InvestX, told me.

Except, nothing is happening.

“The bad companies can’t go public, and the good companies don’t want to go public in a bad market,” Matt Kennedy from Renaissance Capital said.

A terrible performance for stocks in October, higher-for-longer interest rates, poor after-market performances from the recent spate of initial public offerings this summer and the prospects of dramatically lower valuations appear to be causing many IPO candidates to rethink or delay their debuts.

The steady rise in the 10-year Treasury yield was a particular deal killer.

“That was a big wet blanket” for the IPO market, Greg Martin from Rainmaker Securities told me.

Companies delaying IPOs

Waystar, which was considering launching its roadshow last week, is reportedly delaying its IPO until December or into 2024.

Last week, the Wall Street Journal reported that Panera Bread was laying off 17% of its corporate staff in advance of a possible IPO next year.

Others still interested in an IPO may have to take very large haircuts.

Buy now, pay later firm Klarna, another oft-mentioned IPO candidate, told CNBC it has no immediate plans to go public. The company last raised cash at a valuation of $6.7 billion, which marked a massive 85% haircut to its previous valuation of nearly $46 billion.

Chinese fast-fashion giant Shein has not made a decision on the timing or valuation of an IPO, but sources familar with the company’s plans told Bloomberg the company was targeting a valuation of $80 billion to $90 billion. However, the most recent funding round in May valued the company at $66 billion.

This is in stark contrast to most years, when big IPOs went public in November and December.

Rivian, the biggest IPO of 2021, priced on Nov. 9, 2021, and began trading the next day. Hertz raised $1.3 billion in November 2021. Braze raised $500 million the same month, Sweetgreen raised $364 million. Allbirds raised $303 billion.

Airbnb went public in December 2020 and raised $3.5 billion. The day before that, Doordash raised $3.4 billion. A month earlier, in November 2020, Sotera Health raised $1.1 billion, and Miravai Life Sciences raised $1.6 billion.

But the year-end IPO gold rush fizzled in 2022, and it’s fizzling again this year.

So far, 96 IPOs have raised $18.8 billion in 2023, according to Renaissance Capital. That’s following on 2022, when a measly $7.7 billion was raised, the worst year for IPOs in decades. By contrast, a normal year should see at least $50 billion raised.

Recent IPOs aren’t helping

It didn’t help that the recent spate of IPOs have not gone well.

“What I was hearing was that everyone that was lining up after Instacart went public [in September] pulled their deal and everything went a bit quiet,” Short told me.

Three of the biggest IPOs of the year are trading below their offering prices, and, a fourth, Arm, is trading near its debut price, after dipping below it in early trading Thursday.

Largest IPOs, 2023
(from offering price)

Arm about flat
Kenvue down 13%
Birkenstock down 8%
Instacart down 10%

Source: Renaissance Capital

Marketing automation company Klaviyo, which went public in September, is also trading 8% below its offering price of $30 after reporting earnings on Tuesday.

Restaurant chain Cava Group went public in June and at $31 is trading above its initial offering price of $22, but the stock was as high as $57 in the month after it went public, so at Wednesday’s price of $31 most of the original buyers of the stock after the open are under water.

The Renaissance Capital IPO ETF (IPO), a basket of roughly 60 of the largest IPOs in the past two years, is down 17% from its July peak to October trough, S&P wasn’t as bad but similar trajectory.

Some companies may still go public

The market is not completely closed.

“I wouldn’t discount December. If the latest rally continues, we could get more activity,” Kennedy said. “Companies want to go public when there is an expectation the market is going to trade up.”

There are some small firms still in the pipeline.

U.S. natural gas producer BKV, which filed for a $100 million IPO in November of last year, recently updated its prospectus, which is a sign they are still looking to go public.

Homebuilder Smith Douglas, which filed for a $100 million IPO in September, also updated its prospectus in mid-October.

American Healthcare REIT, which filed in September 2022, filed updated financials and announced an additional underwriter (Morgan Stanley) this week.

Here’s another problem: AI

So what happens to some of the older IPO candidates like Reddit or Stripe? As time goes on, they get less interesting.

“The excitement right now is in the AI space, but none of them are ready yet to go public,” Short said. “There are a lot of names still burning cash, but there’s not a lot of capital available for anything that isn’t AI right now.”

That is the main reason Arm is one of the few IPOs that isn’t down sharply.

“Anything associated with AI is a whole other category, and Arm is definitely getting a halo effect,” Short said. Arm reported its first earnings as a public company Wednesday night. Its shares were down about 7% in trading Thursday after offering a weak outlook.

Tough choices for IPO candidates

That leaves IPO candidates with three choices: 1) go public, likely with a substantial haircut, 2) stay private, also likely with a haircut, and hope that your venture capital source will continue to fund you, or 3) merge or go out of business.

Greg Martin from Rainmaker Securities runs one of the leading private platforms for trading pre-IPO companies. He told me the companies in the best position are those who could fund their operations from their own cash flow, but that is not a large group.

“The private financing markets are even worse than the public financing markets, so you really don’t want to be running out of cash right now,” Martin said, adding that he is seeing much lower prices for private sales of stock compared with two years ago.

That leaves many of the roughly 800 tech unicorns (those with valuations above $1 billion) in a precarious position.

“We are starting to see unicorns die,” Martin said. “There’s a lot of lower quality unicorns with negative EBIDTA [cash flow], and there’s not much demand for them in the public markets, so the M&A route is increasingly likely for a lot of companies.”

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Stocks making the biggest moves midday: Spotify, RTX, General Electric and more

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Check out the companies making headlines in midday trading.

3M – Shares of the chemical manufacturer rose 5.5% following the company’s latest earnings report. 3M posted $7.99 billion in revenue, beating analysts’ estimates of $7.87 billion, according to Refinitiv. The company also raised its full-year earnings guidance and reaffirmed its revenue guidance.

Spotify — The music streaming platform tumbled 14% following weaker-than-expected revenue and guidance. Spotify reported revenue of €3.18 billion, below the consensus estimate of €3.21 billion from analysts polled by Refinitiv. Full-year revenue guidance was also softer than analysts forecasted. The results follow the company’s announcement that it will raise prices for premium subscription plans.

Alaska Air — Shares of Alaska Air shed 12%, even as the airline beat estimates on top and bottom lines for the second quarter. The airline reported $3 in adjusted earnings per share on $2.84 billion in revenue. Analysts surveyed by Refinitiv were expecting $2.70 in earnings per share on $2.77 billion in revenue. The airline’s full-year earnings guidance of $5.50 to $7.50 per share was roughly in-line with the average analyst estimate of $6.65, according to FactSet.

RTX – Shares of the defense contractor sank more than 12% after it disclosed an issue affecting a “significant portion” of its Pratt & Whitney engines that power Airbus A320neo models. Elsewhere, RTX reported second-quarter earnings that topped Wall Street expectations, posting $1.29 in adjusted earnings per share on $18.32 billion in revenue. Analysts polled by Refinitiv called for $1.18 in earnings per share and $17.68 billion in revenue.

F5 — Shares of the cloud software company rallied 5.7%. Late Monday, F5 posted a top- and bottom-line beat in its fiscal third quarter. The company reported adjusted earnings of $3.21 per share on revenue of $703 million. Analysts called for $2.86 in earnings per share and revenue of $699 million, according to Refinitiv.

NXP Semiconductors — Shares rose 4% following the chipmaker’s quarterly earnings announcement Monday after hours. NXP reported $3.43 in adjusted earnings per share on $3.3 billion in revenue. Analysts had estimated $3.29 earnings per share and revenue of $3.21 billion, according to Refinitiv. The company’s projected third-quarter earnings also topped analysts’ estimates. 

General Electric — Shares of the industrial giant popped more than 5% to hit a 52-week high after the company posted stronger-than-expected earnings for the second quarter. GE reported adjusted earnings of 68 cents per share on revenue of $16.7 billion. Analysts called for earnings of 46 cents per share on revenue of $15 billion, according to Refinitiv. GE also boosted its full-year profit guidance, saying it’s getting a boost from strong aerospace demand and record orders in its renewable energy business.

Whirlpool — Whirlpool slid more than 3% a day after reporting weaker-than-expected revenue in its second quarter. The home appliance company posted revenue of $4.79 billion, lower than the consensus estimate of $4.82 billion, according to Refinitiv. It did beat on earnings expectations, reporting adjusted earnings of $4.21 per share, higher than the $3.76 estimate.

Biogen — Shares of the biotech company declined 3.8% after its second-quarter earnings announcement. Biogen posted adjusted earnings of $4.02 per share on revenue of $2.46 billion. Analysts polled by Refinitiv anticipated earnings of $3.77 per share and revenue of $2.37 billion. Revenue for the biotech company was down 5% year over year. The company also announced it would slash about 1,000 jobs, or about 11% of its workforce, to cut costs ahead of the launch of its Alzheimer’s drug Leqembi. 

Progressive — The insurance company’s shares lost nearly 2% following a downgrade by Morgan Stanley to underweight from equal weight. The firm cited too many negative catalysts as its reason for the downgrade. 

MSCI — Shares gained 9% after the company’s second-quarter earnings and revenue came above analysts’ estimates. The investment research company posted $3.26 earnings per share, excluding items, on revenue of $621.2 million. Analysts polled by FactSet had expected $3.11 earnings per share on $602.5 million. 

General Motors — The automaker’s stock dipped about 4.5%. GM’s latest quarterly results included a surprise $792 million charge related to new commercial agreements with LG Electronics and LG Energy Solution. Separately, he company lifted its 2023 guidance for a second time this year. GM also reported a second-quarter beat on revenue, posting $44.75 billion compared to the $42.64 billion anticipated by analysts polled by Refinitiv.

UPS – Shares of UPS rose about 1% after the Teamsters union announced a tentative labor deal with the shipping giant on Tuesday.

Invesco — The investment management firm’s shares fell 5% after it posted adjusted earnings of 31 cents per share in the second quarter, while analysts polled by FactSet estimated 40 cents per share. President and CEO Andrew Schlossberg said the company would focus on simplifying its organizational model, strengthening its strategic focus, as well as aligning its expense base. 

Xerox – Shares of the workplace products and solutions provider gained more than 7% after the company raised its full-year operating margin and free cash flow guidance. Xerox now anticipates adjusted operating margin of 5.5% to 6%, compared to earlier guidance of 5% to 5.5%. It also calls for at least $600 million in cash flow, compared to its previous outlook of at least $500 million.

Packaging Corp of America — The packaging products company’s stock surged more than 10%, reaching a new 52-week high. In the second quarter, the company posted earnings of $2.31 per share, excluding items, beating analysts’ estimates of $1.93 per share, according to Refinitiv. The company cited lower operating costs from efficiency, as well as lower freight and logistics expenses. Its revenue of $1.95 billion, meanwhile, came below analysts’ estimates of $1.99 billion, according to FactSet.

Zscaler — Shares of the IT security company popped 4.5% after a BTIG upgrade to buy from neutral. “Our fieldwork leads us to believe that demand in the Secure Service Edge (SSE) has sustainably improved and that large projects which were put on hold in late 2022/early 2023 are starting to move forward again,” BTIG said in a note.

Sherwin-Williams – Shares added more than 3% after the company reported record revenue for the second quarter to $6.24 billion. Analysts called for $6.03 billion in revenue, according to FactSet. The company notched adjusted earnings per share of $3.29, while analysts estimated $2.70 per share.

— CNBC’s Yun Li, Samantha Subin, Sarah Min, Tanaya Macheel, Brian Evans and Alex Harring contributed reporting

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The unlikely rise of orange juice as a stock market darling

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Orange juice has become the most profitable raw material for investors, according to French daily newspaper Les Échos. While average prices for many raw materials have fallen, stocks for the popular breakfast drink have seen a spectacular rise since the start of the year that shows no signs of slowing.  

“More profitable than oil, traders flock to orange juice,” the financial newspaper Les Échos said in an article published on Monday. 

Prices for the drink have soared since the start of the year, and investors have been paying attention. “Orange juice is quite simply the most profitable raw material right now,” said Alexandre Baradez, market analyst at financial services company, IG France. 

The company has listed orange juice as one of the best commodities to invest in over the coming months along with copper and gold.  

A 30 percent increase in six months 

Market speculators often have a preference for raw materials, the stock prices of which can fluctuate dramatically due to current events. Petrol, gas and wheat prices, for instance, have been significantly impacted by the war in Ukraine. For traders investing in these materials on the stock market, there is significant risk but also the prospect of large returns.  

Orange juice, though, has not been impacted by fighting in Bakhmut, sanctions on Russia, or lack of Ukrainian cereal exports. Even so, prices for the drink have soared by 30 percent since the start of the year. 

In the same time period, the average price for raw materials overall has fallen by 11 percent, according to Bloomberg. Stock prices for petrol have fallen by 12 percent since January. 

“The performance of orange juice is remarkable,” said Baradez. “Even more so because the increase has lasted for some time already, which is in itself quite rare.”  

While prices for raw materials tend to be cyclical with periods of high volatility, orange juice stocks have been high for months and are expected to keep rising.  

“Orange Juice rose from circa $90/lbs at the start of 2020 to over $285/lbs last month. While the traditional breakfast drink has now fallen back to $255/lbs, further moves upwards could be imminent,” a report from IG said. 

Florida oranges 

The US state of Florida has long been a hub of orange juice concentrate production for North America – a market that strongly influences global prices for the raw material. In recent years, “Florida has been hit by a succession of factors that have pushed prices higher”, Baradez said. 

Historically, Florida has produced more than 80 percent of US orange crops each year but production has been plummeting for years.  

Just over five years ago, the state-wide industry was worth $9 million and employed some 70,000 people. Today, that number has fallen to 32,000 employees and the industry value has fallen to $6 million, according to the Washington Post. 

The US Department of Agriculture expects 2023 to bring the worst harvest of Florida oranges in 80 years, producing 16 million boxes of orange juice – down a historic 61 percent on the 41 million produced in 2022.  

Poor tree health, the Covid pandemic and harmful weather events have all played a role.   

In 2005, orange trees in Florida were found to have a small type of bacteria that was making them sick. This was the start of a bought of yellow dragon disease (also called Huanglongbing) that had spread to almost 90 percent of commercial orange groves in Florida by 2015. 

There is no known cure for the disease, which kills trees within five years and makes fruit produced in the interim significantly more bitter.   

As Florida has struggled to maintain production, demand for orange juice began to soar. The Covid pandemic boosted sales in the US, as the drink is typically seen as a way to load up on vitamins and ward off illnesses such as colds and flus. By the end of March 2020, US sales of orange juice were up 38 percent compared with the same period the previous year.   

Then, another blow for farmers. In 2022, hurricanes Nicole and Ian devastated citrus fields in Florida. Damage caused by Hurricane Ian alone cost Florida’s orange juice industry $247 million. 

A new market? 

The current situation is “the result of a classic discrepancy between supply and demand”, said Baradez.  

To try to make up the shortfall, California has increased its orange juice production. Brazil – the largest global exporter of orange juice – has also increased sales to North America. But these measures are not having a significant impact on the financial market, which has its own influence over prices.  

Market speculators “have played a role in accelerating this phenomenon”, said Baradez.

A small number of powerful hedge funds and traders have an enormous influence on commodity prices. There are around 20 who wield enough power to decide “whether it will rain or shine” on the markets, according to Les Échos. And their influence is even stronger for a stock like orange juice, which has less investors than for traditionally popular markets such as oil, wheat, sugar and coffee. 

Looking to the future for orange juice prices, “there is no reason for the trend to reverse”, said Baradez. There is still no remedy for yellow dragon disease (which was also detected in California in 2018) and Florida is one of the US states most susceptible to seasonal hurricanes. 

As such, price increases look set to persist around the world ­– bad news for orange juice consumers who, in turn, are likely to see supermarket prices for orange juice continue to rise.  

There is also the potential for wider impact public health issue. “This is becoming a problem for many governments which rely on cheap OJ to get vitamin C into the general population,” the IG report said.  

While orange juice becomes too expensive for some, demand may grow for cheaper alternative sources of vitamin C such as medicines and food supplements. Ultimately this could push prices up for these products too – no doubt creating a ripe new market for stock market investors.

This article has been adapted from the original in French.

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Stocks making the biggest moves premarket: United Airlines, Netflix, Morgan Stanley and more

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Check out the companies making headlines before the bell.

United Airlines — The airline lost 0.9% in the premarket after it announced a net loss for the first quarter. United posted a loss of 63 cents per share, which is 10 cents smaller than the 73-cent estimated loss from analysts polled by Refinitiv. The company reported $11.43 billion in revenue, slightly above the $11.42 billion estimated. 

Interactive Brokers Group — Shares of the electronic broker were down 3.7% after the company reported a miss on earnings in the first quarter. The company posted earnings per share of $1.35, which fell below the $1.41 consensus estimate from analysts polled by Refinitiv.

Netflix – Shares of the streaming giant fell more than 2% after the company reported mixed results on the delayed rollout of its crackdown on password-sharing, which was originally scheduled for the first quarter. Revenue came in slightly below the analyst consensus from Refinitiv, although earnings topped estimates.

Western Alliance – Shares of the beaten-down regional bank jumped more than 20% in premarket trading after Western Alliance said its deposits have been rebounding in April after declining 11% in the first quarter. Wedbush upgraded the stock to outperform after Western Alliance’s quarterly report despite the bank’s net income falling more than 50% from the previous quarter.

Travelers — The insurance stock added more than 3% before the bell after beating Wall Street’s expectations on both the top and bottom lines. The Dow Jones Industrial Average component reported adjusted earnings of $4.11 a share on $9.40 billion in net premiums.

Intel — Shares were down almost 2% after the semiconductor manufacturer announced it would be discontinuing its bitcoin mining chip series, Blockscale, after just a year of production. 

Abbott Laboratories — The medical device company advanced 2.8% after beating top- and bottom-line expectations and reaffirming guidance. The company reported $1.03 in earnings per share on revenue of $9.75 billion for the first quarter, while analysts polled by FactSet anticipated 99 cents in per-share earnings on $9.67 billion in revenue. The company said it still expects full-year adjusted earnings per share to come in between $4.30 and $4.50, in line with the $4.39 consensus estimate of analysts. 

U.S. Bancorp — Shares of the bank were up 1.7% after it announced an earnings and revenue beat for the first quarter. U.S. Bancorp posted $1.16 earnings per share and revenue of $7.18 billion. Analysts polled by Refinitiv had estimated per-share earnings of $1.12 and revenue of $7.12 billion. Meanwhile, the bank reported its quarter-end deposits were down 3.7% to $505.3 billion. 

Rivian Automotive — The electric-vehicle maker slipped about 2% after being downgraded by RBC Capital Markets to sector perform from outperform. The Wall Street firm remains constructive on the longer-term outlook for the stock, but sees limited catalysts to accelerate profitability in the near term. It also slashed its price target in half, to $14 from $28 per share.

ASML Holding – Shares of the chipmaker lost 2.6% in early morning trading after the company reported net bookings for the first quarter were down 46% year-over-year on “mixed signals” from customers as they work through inventory. The shares fell despite ASML reporting an earnings beat for the quarter.

Boeing — Shares of the industial rgiant dipped 0.6% in premarket after CEO Dave Calhoun said that a flaw detected in some of its 737 Max planes won’t hinder its supply chain plans for increased production of its bestselling jetliner this year. The company disclosed a flaw with some of its 737 Max planes last week and said it was likely to delay deliveries.

Morgan Stanley  — Shares were down 3.2% after the bank announced its quarterly earnings. The investment bank and wealth manager posted earnings per share of $1.70 for the first quarter, greater than the $1.62 estimate from analysts polled by Refinitiv. Overall revenue came in at $14.52 billion, above the $13.92 billion consensus estimate from Refinitiv as equities and fixed income trading units performed better than expected. One growth area was wealth management, where revenue increased by 11% from a year ago. The shares, which are outperforming most other banks this year, eased by 2% in early trading despite the results.

Ally Financial — The digital financial services company’s shares were down 1.3% after its first quarter earnings and revenue missed Wall Street’s expectations. Ally posted per-share earnings of 82 cents, while analysts had anticipated 86 cents per share, according to FactSet data. The bank’s adjusted total net revenue also fell below estimates, coming in at $2.05 billion versus the $2.07 billion consensus estimate from FactSet analysts.  

Intuitive Surgical — Shares jumped 8.1% after Intuitive Surgical reported an earnings and revenue beat. The company reported adjusted earnings per share of $1.23, topping against a consensus estimate of $1.20 per share, according to FactSet. Revenue grew 14% from the prior year, coming in at $1.70 billion, compared to estimates of $1.59 billion.

Tesla – Shares dropped more than 2% in the premarket after Tesla slashed prices on some of its Model Y and Model 3 electric vehicles in the U.S. The cuts come ahead of Tesla’s earnings report after the bell on Wednesday and is the sixth time the EV maker has lowered prices in the U.S. this year.

 Zions Bancorporation — The regional bank stock jumped nearly 4% in premarket before its earnings report after the bell Wednesday. Investors could be getting optimistic after its peer Western Alliance said in its first-quarter that deposits have stabilized since last month’s collapse of Silicon Valley Bank.

CDW — The IT company’s shares plunged 10.6% after it reported a weaker-than-expected preliminary quarterly earnings report. CDW issued quarterly revenue guidance of $5.1 billion, falling below the FactSet analysts’ consensus estimate of $5.58 billion. The company said it was significantly impacted by more cautious buying amid economic uncertainty. It also issued guidance for its full-year earnings to fall “modestly below” 2022 levels.

Citizens Financial Group — Shares were down almost 4% after the company’s first-quarter earnings disappointed investors. Citizens Financial’s earnings per share came in at $1, while analysts had estimated $1.13, according to Refinitiv data. The company’s revenue of $2.13 billion also came below analysts’ expectations of $2.14 billion. Citizens Financial reported a 4.7% decline in deposits to $172.2 billion.

— CNBC’s Alex Harring, Tanaya Macheel, John Melloy, Michelle Fox, Yun Li, Jesse Pound and Kristina Partsinevelos contributed reporting

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The Fed is likely to hike rates by a quarter point but it must also reassure it can contain a banking crisis

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The Federal Reserve is expected to raise interest rates Wednesday by a quarter point, but it also faces the tough task of reassuring markets it can stem a worse banking crisis.

Economists mostly expect the Fed will increase its fed funds target rate range to 4.75% to 5% on Wednesday afternoon, though some expect the central bank could pause its hiking due to concerns about the banking system. Futures markets were pricing in a roughly 80% chance for a rate rise, as of Tuesday morning.

The central bank is contemplating using its interest rate tools at the same time it is trying to soothe markets and stop further bank runs. The fear is that rising rates could put further pressure on banking institutions and crimp lending further, hurting small businesses and other borrowers.

“The broader macro data shows some further tightening is warranted,” said Michael Gapen, chief U.S. economist at Bank of America. He said the Fed will have to explain its double-barreled policy. “You have to show you can walk and chew gum at the same time, using your lender-of-last-resort powers to quell any fears about deposit flights at medium-sized banks.”

U.S. Federal Reserve Chair Jerome Powell addresses reporters after the Fed raised its target interest rate by a quarter of a percentage point, during a news conference at the Federal Reserve Building in Washington, February 1, 2023.

Jonathan Ernst | Reuters

Federal regulators stepped in to guarantee deposits at the failed Silicon Valley Bank and Signature Bank, and they provided more favorable loans to banks for a period of up to one year. The Fed joined with other global central banks Sunday to enhance liquidity through the standing dollar swap system, after UBS agreed to buy the embattled Credit Suisse.

Investors will be looking for assurances from Fed Chairman Jerome Powell that the central bank can contain the banking problems.

“We want to know it’s really about a few idiosyncratic institutions and not a more pervasive problem with respect to the regional bank model,” said Gapen. “In these moments, the market needs to know you feel you understand the problem and that you’re willing and capable of doing something about it. … I think they are exceptionally good at understanding where the pressure is that’s driving it and how to respond.”

A month of turmoil

Markets have been whipsawed in the last month, first by a hawkish-sounding Fed and then by fears of contagion in the banking system.

Fed officials begin their two-day meeting Tuesday. The event kicks off just two weeks after Powell warned a congressional committee that the Fed may have to hike rates even more than expected because of its battle with inflation.

Those comments sent interest rates soaring. A few days later, the sudden collapse of Silicon Valley Bank stunned markets, sending bond yields dramatically lower. Bond yields move opposite price. Expectations for Fed rate hikes also moved dramatically: What was expected to be a half-point hike two weeks ago is now up for debate at a quarter point or even zero.

Stock Chart IconStock chart icon

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The 2-year Treasury yield is most sensitive to Fed policy.

Messaging is the key

Gapen expects Powell to explain that the Fed is fighting inflation through its rate hikes but then also assure markets that the central bank can use other tools to preserve financial stability.

“Things going forward will be done on a meeting-by-meeting basis. It will be data dependent,” Gapen said. “We’ll have to see how the economy evolves. … We’ll have to see how financial markets behave, how the economy responds.”

The Fed is scheduled to release its rate decision along with its new economic projections at 2 p.m. ET Wednesday. Powell will speak at 2:30 p.m. ET.

The issue is they can change their forecast up to Tuesday, but how does anyone know?

Diane Swonk

Chief economist at KPMG

Gapen expects the Fed’s forecasts could show it expects a higher terminal rate, or end point for rate hikes, than it did in December. He said it could rise to about a level of 5.4% for 2023, from an earlier projection of 5.1%.

Jimmy Chang, chief investment officer at Rockefeller Global Family Office, said he expects the Fed to raise interest rates by a quarter point to instill confidence, but then signal it is finished with rate hikes.

“I wouldn’t be surprised if we get a rally because historically whenever the Fed stops hiking, going to that pause mode, the initial knee-jerk reaction from the stock market is a rally,” he said.

He said the Fed will not likely say it is going to pause, but its messaging could be interpreted that way.

“Now, at the minimum, they want to maintain this air of stability or of confidence,” Chang said. “I don’t think they’ll do anything that could potentially roil the market. … Depending on their [projections], I think the market will think this is the final hike.”

Fed guidance could be up in the air

Diane Swonk, chief economist at KPMG, said she expects the Fed is likely to pause its rate hiking because of economic uncertainty, and the fact that the contraction in bank lending will be equivalent to a tightening of Fed policy.

She also does not expect any guidance on future hikes for now, and Powell could stress the Fed is watching developments and the economic data.

“I don’t think he can commit. I think he has to keep all options on the table and say we’ll do whatever is necessary to promote price stability and financial stability,” Swonk said. “We do have some sticky inflation. There are signs the economy is weakening.”

Fed needs to 'call a timeout' and stop hiking rates, says Bleakley's Peter Boockvar

She also expects it will be difficult for the Fed to present its quarterly economic forecasts, because the problems facing the banks have created so much uncertainty. As it did during the Covid pandemic in March 2020, the Fed might temporarily suspend projections, Swonk said.

“I think it’s an important thing to take into account that this is shifting the forecast in unknown ways. You don’t want to overpromise one way or the other,” she said. Swonk also expects the Fed to withhold its so-called dot plot, the chart on which it shows anonymous forecasts from Fed officials on the path for interest rates.

“The issue is they can change their forecast up to Tuesday, but how does anyone know? You want the Fed to look unified. You don’t want dissent,” said Swonk. “Literally, these dot plots could be changing by the day. Two weeks ago, we had a Fed chairman ready to go 50 basis points.”

The impact of tighter financial conditions

The tightening of financial conditions alone could have the clout of a 1.5 percentage point hike in rates by the Fed, and that could result in the central bank cutting rates later this year, depending on the economy, Swonk said. The futures market is currently forecasting much more aggressive rate cutting than economists are, with a full percentage point — or four quarter-point cuts — for this year alone.

“If they hike and say they will pause, the market might actually be okay with that. If they do nothing, maybe the market gets nervous that after two weeks of uncertainty the Fed’s backing off their inflation fight,” said Peter Boockvar, chief investment officer at Bleakley Financial Group. “Either way we still have a bumpy road ahead of us.”

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The Fed could also make a surprise move by stopping the runoff of securities from its balance sheet. As Treasurys and mortgages mature, the Fed no longer replaces them as it did during and after the pandemic to provide liquidity to financial markets. Gapen said changing the balance sheet runoff would be unexpected. During January and February, he said about $160 billion rolled off the balance sheet.

But the balance sheet recently increased again.

“The balance sheet went up by about $300 billion, but I think the good news there is most of that went to institutions that are already known,” he said.

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