It was a rough month for investors in the market, but some stocks had more meaningful moves than others. These four stocks illustrate important trends that are likely to influence stock market performance over the next few months. Consider these dynamics before making changes to your portfolio.
1. Tesla (Price change: -19.7%)
Tesla (TSLA -1.11%) stock dropped almost 20% last month due to a combination of bad news and unfavorable market conditions. The company reported weak third-quarter earnings with low delivery volume. Investors were prepared for bad news, and the results were even worse than feared.
Tesla's operating expenses and capital investments continue to rise, so the revenue weakness translated to deteriorating profit margins and lower cash flows. That's a disaster scenario for a growth stock with expensive valuation ratios and increasing competition.
High interest rates and inflation pressures are weighing on demand for durables and big-ticket items, including automobiles. The sector also struggled with a labor strike this year that is likely to result in higher costs moving forward. In addition, several major auto manufacturers cast doubt on electric vehicle (EV) profitability, thanks to high manufacturing and development costs amid fierce price competition.
Image source: Getty Images.
Tesla's industry peers Ford, Rivian, and General Motors all sank during the month, but the EV leader's large market cap had excess influence over major indexes. It's a rough environment for consumer discretionary stocks right now. Prepare yourself for volatility in this sector, especially if you hold stocks with more aggressive valuations.
2. Microsoft (Price change: +7.1%)
Microsoft (MSFT 1.82%) was once again a bright spot in the market, illustrating an important trend that's been impacting equity markets all year. High interest rates, combined with a weak outlook for global economic growth, have discouraged stock investments. It's hard to justify the volatility risk when bonds issued by reliable governments bear high yields.
However, many investors have concluded that interest rates are unlikely to rise much from here, even if they remain high for a while. Corporate earnings and the job market have remained resilient, encouraging some investors to position themselves for the eventual rebound from the 2022 correction.
That dynamic is pushing investors toward a small number of high-quality companies with above-average growth prospects. Microsoft is the poster child of this dynamic. The company once again delivered strong quarterly earnings as other businesses struggled.
Microsoft produces a ton of reliable cash from its legacy product portfolio, and it also has strong growth catalysts from its gaming, cloud computing, and artificial intelligence businesses. The tech giant isn't going anywhere, but it also has some upside potential, which is rare. Its forward P/E ratio is just over 30, so its valuation doesn't create too much volatility risk.
That illustrates an important market trend that might be flying under most investors' radars. The headlines show that the S&P 500 is up 10% this year while the Nasdaq has risen an impressive 33%. That suggests that things are strong for corporate financials and stocks in general, but that's not the case. Equal-weight market indexes paint a very different picture. The Invesco S&P 500 Equal Weight ETF is down 4% this year, while the Direxion NASDAQ-100 Equal Weight ETF is only up 12%.
Both equal-weight funds are significantly lagging the market-cap weighted versions, illustrating that most stocks are actually struggling throughout a recovery year. In other words, a small number of large companies are propping up the market. This trend can't last forever, but it's showing no signs of slowing for now.
3. RTX (Price change: +13.1%)
RTX (RTX -0.29%) stock rose 14% in October, leading a charge for a strong month among defense and aerospace stocks. RTX shares were down nearly 30% year to date entering last month, with several factors contributing to its struggles. The largest drag on the stock was a safety issue with its Pratt & Whitney engines that would cost billions to address. The company disclosed that information and cut its full-year forecasts during its July quarterly earnings report.
The defense sector trailed the S&P 500 by a significant gap during the first three quarters of 2023. The sector's biggest names displayed a common theme in earnings calls, citing strong demand that was offset by supply chain issues that are hurting delivery volumes and shrinking profit margins.
The beaten-down defense sector showed clear signs of an emerging recovery in October. Investors were pleased with RTX's third-quarter earnings report, even though the company's sales fell and it reported a net loss associated with the Pratt & Whitney issue. Instead, investors focused on commentary that RTX was likely to benefit from expanding defense budgets related to conflict and rising tensions in the Middle East.
Now that the Pratt & Whitney losses have been fully digested, the stock's price was driven by new catalysts that were shared with industry peers such as General Dynamics, Northrop Grumman, and Lockheed Martin.
The defense sector's October performance shows the importance of news-driven hype for stock valuation. As major indexes slumped last month, a handful of beaten-down stocks bucked the trend due to investor optimism about fundamentals.
4. Chevron (Price change: -13.6%)
Shares of Chevron (CVX 0.37%) dropped 14% last month. The company reported disappointing quarterly earnings due to falling commodity prices. That news was compounded by falling oil prices, which dropped nearly 10% in the month.
While larger companies in the energy sector are evaluated on a number of fundamental factors, most of their day-to-day moves in the stock market are driven by commodity prices. Energy and materials were two of the worst-performing sectors in October for this reason. Conflict in the Middle East has the potential to send energy prices higher, but global economic weakness remains a drag on commodity prices. These dynamics are likely to influence large portions of the market over the next few quarters.
