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Goldman Sachs says A.I. will ‘super-charge’ music creation and names 5 stocks to buy

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The music industry is set for a radical shift due in part to generative AI, according to Goldman Sachs , which described the new technology as providing “significant opportunities” for the sector. It named five buy-rated stocks to play the trend: Live Nation , Warner Music Group , French digital music company Believe , China’s NetEase , and Universal Music Group . All of the stocks are on its conviction list of top stocks. “Generative AI will super-charge music creation capabilities and improve productivity,” according to Goldman’s analysts in a June 28 note. And investors’ concerns over AI-generated music, such as a track reportedly created using the technology and featuring a “fake Drake” in April, are “overstated,” they suggested. Companies such as Deezer and Believe are using AI to detect when a music track has been created by AI, the analysts noted, while publishers are working with streaming sites like Spotify to take artificially generated tracks down. The music industry is well set up to protect its intellectual property given that it is dominated by three large companies that own the majority of artists’ catalogs, according to Goldman. “We believe the music industry is on the cusp of another major structural change given the persistent under-monetisation of music content, outdated streaming royalty payout structures and the deployment of Generative AI,” the analysts added. Streaming means it’s easier than ever for people to access music, but revenue has not matched consumption, the analysts noted. “For example, we estimate that the revenue per audio stream has fallen 20% in the past 5 years and that the revenue per hour streamed of music for Spotify is 4x lower than for Netflix ,” the bank stated. Goldman likes events promoter Live Nation as it expects artists to tour more frequently due to what it calls the globalization of music. It added that younger generations becoming more aware of performers via social media will also boost the industry. On Believe, the bank said: “We expect the company to continue gaining market share with its digital-first approach, particularly in the fast-growing emerging markets across Asia.” WMG, meanwhile, is “one of the highest quality long-term growth compounders in our coverage group,” according to the analysts, while its competitor, UMG is on its conviction list for Europe, which comprises. “We believe UMG possesses several competitive advantages, including its scale, clear and consistent track record in breaking artists, the depth and breadth of its catalogue, and its ability to spot new trends early, under the stewardship of an experienced management team,” the analysts stated. Goldman chose Chinese internet company NetEase, which has a music streaming platform, for its use of AI in its music composition tools. — CNBC’s Michael Bloom contributed to this report.

Blend Images – Pbnj Productions | Tetra Images | Getty Images

The music industry is set for a radical shift due in part to generative AI, according to Goldman Sachs, which described the new technology as providing “significant opportunities” for the sector.

It named five buy-rated stocks to play the trend: Live Nation, Warner Music Group, French digital music company Believe, China’s NetEase, and Universal Music Group. All of the stocks are on its conviction list of top stocks.

“Generative AI will super-charge music creation capabilities and improve productivity,” according to Goldman’s analysts in a June 28 note. And investors’ concerns over AI-generated music, such as a track reportedly created using the technology and featuring a “fake Drake” in April, are “overstated,” they suggested.

Companies such as Deezer and Believe are using AI to detect when a music track has been created by AI, the analysts noted, while publishers are working with streaming sites like Spotify to take artificially generated tracks down.

The music industry is well set up to protect its intellectual property given that it is dominated by three large companies that own the majority of artists’ catalogs, according to Goldman.

“We believe the music industry is on the cusp of another major structural change given the persistent under-monetisation of music content, outdated streaming royalty payout structures and the deployment of Generative AI,” the analysts added.

Streaming means it’s easier than ever for people to access music, but revenue has not matched consumption, the analysts noted. “For example, we estimate that the revenue per audio stream has fallen 20% in the past 5 years and that the revenue per hour streamed of music for Spotify is 4x lower than for Netflix,” the bank stated.

Goldman likes events promoter Live Nation as it expects artists to tour more frequently due to what it calls the globalization of music. It added that younger generations becoming more aware of performers via social media will also boost the industry.

On Believe, the bank said: “We expect the company to continue gaining market share with its digital-first approach, particularly in the fast-growing emerging markets across Asia.”

WMG, meanwhile, is “one of the highest quality long-term growth compounders in our coverage group,” according to the analysts, while its competitor, UMG is on its conviction list for Europe, which comprises.

“We believe UMG possesses several competitive advantages, including its scale, clear and consistent track record in breaking artists, the depth and breadth of its catalogue, and its ability to spot new trends early, under the stewardship of an experienced management team,” the analysts stated.

Goldman chose Chinese internet company NetEase, which has a music streaming platform, for its use of AI in its music composition tools.

— CNBC’s Michael Bloom contributed to this report.

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July 4, 2023

Legacy media companies enter dark times as failures mount and Netflix rises again

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Bob Iger, CEO of The Walt Disney Company, left; David Zaslav, CEO and president of Warner Bros. Discovery, center; and Bob Bakish, president and CEO of Paramount Global.

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Companies and industries have ups and downs. The legacy media industry is in a valley.

The first half of 2023 has been a colossal disappointment for media executives who wanted this year to be a rebound from a terrible 2022, when a slowdown in streaming subscribers cut valuations for Netflix, Disney, Warner Bros. Discovery and Paramount Global roughly in half.

Instead, investors have once again become excited by Netflix’s future prospects as it’s cracked down on password sharing, potentially leading to tens of millions of new signups. Netflix shares have surged the past five months, outpacing the S&P 500.

Meanwhile, the legacy players can’t get out of their own way.

Netflix vs the S&P 500 over the past five months.

“When it rains it pours,” said LightShed media analyst Rich Greenfield. “It just keeps getting worse.”

It’s been a bumpy ride for Disney Chief Executive Officer Bob Iger since he returned to lead the company late last year. Disney recently finished laying off 7,000 employees. Chief Financial Officer Christine McCarthy stepped down last week. The company is pulling programming from its streaming services to save money. Its animation business is in a major rut, with its latest Pixar movie, “Elemental,” recording the lowest opening weekend gross for the studio since the original “Toy Story” premiered in 1995. Shares have struggled in the past five months.

Disney vs. the S&P 500 over the past five months.

Warner Bros. Discovery vs. the S&P 500 over the past five months.

Paramount Global cut its dividend last quarter as streaming losses peak this year and a weak advertising market exacerbates a terminally ill cable network business. Wells Fargo released an analyst note Friday saying the bull case and the bear case for the company were the same: selling for parts. Warren Buffett, perhaps the most acclaimed investor in history, told CNBC that Paramount’s streaming offering “fundamentally is not that good of a business.”

Paramount Global vs the S&P 500 over the past five months.

Fox Corp. vs the S&P 500 over the past five months.

NBCUniversal has weathered the storm the best, shielded by its parent company, Comcast, which gets its revenue from cable and wireless assets. It’s also taken advantage of missteps from the aforementioned. MSNBC became the No. 1 cable news network this month for the first time in 120 weeks, dethroning Fox News for a week amid coverage of former President Donald Trump’s federal indictment. Universal’s “The Super Mario Bros. Movie” is by far the biggest box office hit of the year, yet shares haven’t moved much.

Comcast vs the S&P 500 over the past five months.

All of this is happening with an extended Hollywood writers’ strike going on in the background with no end in sight. The writers know the longer the strike lasts, the more pain will be inflicted on media companies, who will eventually run out of already-made scripted content. Zaslav recently gave a commencement address to Boston University and was drowned out by boos and chants of “pay your writers.”

This week may bring even more bad news. Film and TV actors are set to join writers on strike unless they reach a deal with Hollywood studios by Friday.

The beneficiary of Hollywood work shutdowns will likely be YouTube, TikTok, and Netflix, which continues to churn out international content that is unaffected by the strike, said Greenfield.

Legacy media may get a small reprieve if advertising jumps back as the 2024 U.S. presidential campaign heats up. But there’s still scant evidence investors will reward media companies for simply cutting costs. There’s currently no strong growth narrative for legacy media, and consolidation prospects are murky as regulators block media-adjacent deals such as Microsoft’s acquisition of Activision and Penguin Random House’s proposed purchase of Simon & Schuster.

The industry just wrapped up its annual advertising gala in Cannes, France. Legacy media executives still spent company dollars to make the trip to hang out on yachts and drink rosé. The backdrop was as beautiful as ever.

But the landscape is bleak.

Disclosure: Comcast owns NBCUniversal, which is the parent company of CNBC.

WATCH: WPP CEO Mark Read on the state of the advertising market, from Cannes Lions 2023

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June 25, 2023

How a hawkish Fed could kill a baby bull-market rally in U.S. stocks

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It is the notion that the Federal Reserve could deliver a hawkish jolt to markets even if it refrains from raising rates when its two-day policy meeting ends on Wednesday.

There are concerns that such an outcome could spark a turnaround in U.S. stocks, especially if an uncomfortably strong reading on May inflation — due this coming Tuesday just as the Fed’s policy meeting is slated to begin — pushes the central bank toward something even more extreme, like delivering a rate increase on Wednesday despite intimating that it plans to abstain.

The May consumer-price index is forecast to rise 4.0% for the year, down from a rise of 4.9%, while the core index, excluding food and energy prices, is seen easing to a rise of 5.3% from 5.5%.

On the other hand, signs that the economy has weakened and inflation has continued to fade would help the Fed to justify skipping a rate increase in June — as several senior officials have suggested it will — while signaling that a potential hike at its following meeting in July could be the final increase for the cycle.

“Softening U.S. data should support calls that a June skip could eventually turn into a July pause. Next week, most of the data is expected to remain weak or little changed: retail sales could be flat m/m, the Fed regional surveys should remain in negative territory, and consumer sentiment will waver,” said Craig Erlam, senior market analyst at OANDA, in emailed commentary.

See: The Fed’s crystal ball on inflation appears off the mark again. Here’s comes another fix.

Wednesday’s meeting comes at a critical time for the market. U.S. stocks have powered ahead for more than six months, with the S&P 500
SPX,
+0.11%
having risen more than 20% off its Oct. 12 closing low, according to FactSet. Just this past week, the index exited bear-market territory for the first time in a year.

The index is up 12% so far in 2023, reversing some of its 19.4% decline from 2022, its biggest calendar-year drop since 2008, according to Dow Jones Market Data.

So far this year, highflying tech stocks have helped to paper over weakness in other areas of the market. This has started to change over the past two weeks, as small-cap and value-stocks have lurched suddenly higher, but there are fears that the Fed could hurt the most interest-rate sensitive technology names if Chairman Jerome Powell hints at rates rising higher than investors presently anticipate.

The so-called “Megacap eight” stocks — a group that includes both classes of Alphabet Inc. stock
GOOG,
+0.16%

GOOGL,
+0.07%,
Microsoft Corp.
MSFT,
+0.47%,
Tesla Inc.
TSLA,
+4.06%,
Microsoft Corp.
MSFT,
+0.47%,
Netflix Inc.
NFLX,
+2.60%,
Nvidia Corp.
NVDA,
+0.68%,
Meta Platforms Inc.
META,
+0.14%
— have driven nearly all of the S&P 500’s gains this year, according to Ed Yardeni, president of Yardeni Research, who included his analysis in a note to clients.

But since the beginning of June, the Russell 2000
RUT,
-0.80%,
a gauge of small-cap stocks in the U.S., has risen more than 6.6%, according to FactSet data. The Russell 1000 Value Index
RLV,
-0.15%
has also gained nearly 3.7% in that time. During this period, both have outperformed the tech-heavy Nasdaq Composite
COMP,
+0.16%,
although the Nasdaq remains the market leader, having risen 26.7% since Jan. 1.

Concerns about the Fed’s plans intensified this week after the Bank of Canada delivered a surprise interest-rate hike, ending a four-month pause. The BOC’s decision followed a similar move by the Reserve Bank of Australia, and partly as a result, U.S. Treasury yields rose and tech-heavy stocks tumbled, with the Nasdaq logging its biggest drop since April 25, according to FactSet.

While small-caps held up amid the chaos, the reaction stoked fears that something similar might be in store for markets when the Fed delivers its latest decision on interest rates Wednesday.

Consequences of a ‘hawkish pause’

Stocks could be in for more turbulence if the Fed signals it plans to follow the BOC and RBA with a hawkish surprise of its own. And it wouldn’t necessarily need to hike rates to pull this off, market strategists said.

Emerging signs of complacency in the market could complicate its reaction. That the Cboe Volatility Index has fallen back below 15
VIX,
+1.32%
for the first time since before the arrival of COVID-19 is one such sign that investors aren’t worried enough about a potential selloff, said Miller Tabak + Co.’s Chief Market Strategist Matt Maley.

Another analyst likened the potential fallout from a hawkish Fed to the bad old days of 2022.

“If the Fed signals that rates will be going up again, the market playbook could read more like 2022 than what we have seen so far in 2023,” said Will Rhind, the founder and CEO of GraniteShares, during a phone interview with MarketWatch.

Perhaps the biggest wild card is Tuesday’s inflation report. If the numbers come in hot, Powell and his peers could face pressure to hike rates without priming the market first.

For this reason, Rhind believes investors are underestimating the likelihood of a hike next week, even as Fed funds futures currently see a roughly 70% probability that the central bank will stand pat, according to the CME’s FedWatch tool.

And Rhind isn’t the only one. Leslie Falconio, chief investment officer at UBS Global Wealth Management, says the Tuesday inflation report could be a make-or-break moment for markets, summing up fears expressed elsewhere on Wall Street in a recent note to clients.

“We believe another rate increase is on the table, and that the CPI release on 13 June, a day before the Fed decision, will be decisive. In our view, another hike won’t have a material impact on the pace of economic growth,” Falconio said.

What should investors watch out for?

Assuming the Fed does forego a hike in June, there are a few key tells that investors should watch for to determine whether a “hawkish pause” is under way.

Perhaps the most important will be how the Fed handles changes to its closely watched “dot plot.” A modestly higher median dot would send an unmistakable signal to the market that the Fed will continue with its campaign of tightening monetary policy, perhaps to the detriment of the market, said Patrick Saner, head of macro strategy at the Swiss Re Institute.

“If the Fed skips but wanted to avoid the impression of the hiking cycle being done, it would need to include a revision of the dot plot. They could justify that with a more resilient GDP forecast and a higher inflation outlook. So I think it is the dots and then the statement that will be in focus,” Saner said during a phone interview with MarketWatch.

Beyond that, whatever the Fed does or says will likely be viewed through the lens of economic data that is due out next week. In addition to the Tuesday inflation report, a report on May retail sales is due out Thursday, and a on consumer sentiment from the University of Michigan will land on Friday. All these data points could influence investors’ impressions of the state of the U.S. economy, and their expectations for how the Fed will behave as a result.

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June 11, 2023

Netflix’s password-sharing crackdown is imminent, but the writers’ strike may be causing a delay

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Netflix Inc. has teased the U.S. rollout of a password-sharing crackdown, but one analyst wonders if the ongoing writers’ strike is delaying the company’s plans.

The streaming-media company has already started to clamp down on account sharing in other markets by limiting who can use accounts and charging more for additional access. JPMorgan’s Doug Anmuth wondered if Netflix
NFLX,
+0.78%
was rethinking a broader rollout at the moment, given the prospect of content interruptions.

See more: Netflix delivers cliffhanger for investors as password-sharing crackdown is delayed

“Paid sharing is effectively a price increase, w/paid members sharing their password receiving less value for the same price, or potentially paying more to add an extra member. And for borrowers who currently do not pay, paid sharing means either activating their own subscription or being added as an extra member, or losing access to NFLX,” he wrote in a note to clients.

For that reason, “it’s possible that NFLX may not like the optics of implementing paid sharing while 11,500 WGA writers are on strike, w/production suspended or writing paused across at least a handful of NFLX titles including Stranger Things S5 & Emily in Paris S4, among others,” Anmuth continued.

Netflix didn’t respond to a MarketWatch request for comment asking when paid sharing will roll out in the U.S., why it hasn’t rolled out yet, and if the delay was at all due to the writers’ strike.

Opinion: Disney shows streaming wars are destroying all that was good about streaming

The paid-sharing rollout is a critical element of Netflix’s financial story these days. Netflix estimates that some 100 million people were freeloading off of others’ paid Netflix subscribers, and Anmuth expected that Netflix would be able to get at least 30 million of those to start paying up, whether by becoming add-on members for existing accounts or new subscribers in their own right.

For that reason, a continuation of the writers’ strike “could further postpone revenue & subscriber acceleration,” he wrote.

The writers’ strike also threatens to impact Netflix’s other hot initiative: its advertising tier. Anmuth noted that the company’s upfront presentation to advertisers, its first-ever, was turning into a prerecorded event, presumably because the company fears “heavy picketing and protesting” and “less availability of star talent.”

“[U]ltimately, advertising is closely tied to paid sharing, w/borrowers likely viewing a $6.99 Standard w/Ads plan as a compelling low-priced option,” Anmuth wrote. “Therefore, ramp of the ad tier is also delayed if paid sharing is delayed.”

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May 17, 2023

The streaming wars are over, and it’s time for media to figure out what’s next

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Robyn Beck | Afp | Getty Images

I’m calling it. The Streaming Wars are over. 2019-2023. RIP.

The race between the biggest media and entertainment companies to add streaming subscribers, knowing consumers will only pay for a limited number of them, is finished. Sure, the participants are still running. They’re just not trying to win anymore.

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Disney announced its flagship streaming service, Disney+, lost 4 million subscribers during the first three months of the year, dropping the company’s total streaming subscribers to 157.8 million from 161.8 million. Disney lost 4.6 million customers for its streaming service in India, Disney+ Hotstar. In the U.S. and Canada, Disney+ lost 600,000 subscribers.

It’s become clear the biggest media and entertainment companies are operating in a world where significant streaming subscriber growth simply isn’t there anymore – and they’re content not to chase it hard. Netflix added 1.75 million subscribers in its first quarter, pushing its global total to 232.5 million. Warner Bros. Discovery added 1.6 million to land at 97.6 million.

The current big media narrative is all about getting streaming to profitability. Warner Bros. Discovery announced last week its U.S. direct-to-consumer business turned a profit of $50 million in the quarter and will remain profitable this year. Netflix’s streaming business turned profitable during the pandemic. Disney on Wednesday announced streaming losses narrowed to $659 million from $887 million.

Netflix has curbed its content spending growth, and Warner Bros. Discovery and Disney have both announced thousands of job eliminations and billions of dollars in content spending cuts in recent months. Disney will “produce lower volumes of content” moving forward, Chief Financial Officer Christine McCarthy said during Wednesday’s earnings conference call, though Chief Executive Bob Iger noted he didn’t think it would have an impact on global subscriber growth.

There’s still some growth among the smaller players. NBCUniversal’s Peacock gained 2 million subscribers last quarter, giving it 22 million subscribers. Paramount Global added 4.1 million subscribers in the quarter, putting it at 60 million subscribers.

But the key question isn’t looking at the growth numbers as much as it’s about the investor reaction to the growth numbers. Paramount Global fell 28% in a day last week after the company announced it was cutting its dividend from 25 cents a share to 5 cents a share to save cash.

Disney+ Hotstar subscribers brought in a paltry 59 cents per month of revenue last quarter, down from 74 cents last quarter. It appears Disney is OK with losing these low-paying customers. Disney gave up its Indian Premier League cricket streaming rights last year. Those rights were acquired for $2.6 billion by Paramount Global.

Disney also announced it’s raising the price of its ad-free Disney+ service later this year. Disney’s average revenue per user for U.S. and Canadian subscribers rose 20% in the most recent quarter after yet another price increase was announced last year. Big price hikes typically aren’t the strategy executives use if the priority is adding subscribers.

What’s next?

Raising prices and cutting costs isn’t a great growth strategy. Streaming was a growth strategy. Maybe it will come back a bit with cheaper advertising tiers and Netflix’s impending password sharing crackdown.

But it’s highly unlikely growth will ever return to the levels seen during the pandemic and the early years of mass streaming.

That probably means the media and entertainment indudstry will need a new growth story soon.

The most obvious candidate is gaming. Netflix has started a fledgling video game service. Comcast considered buying EA last year, as first reported by Puck. Microsoft’s deal for Activision is now in jeopardy after UK regulators blocked the transaction. If that acquisition fails, Activision could immediately be a target for legacy media companies as they look for a more exciting story to tell investors.

While Disney shut down its metaverse division as part of its recent cost cuts, marrying its intellectual property with gaming seems like an obvious match. One can easily envision the growth potential of Disney buying something like Epic Games, which owns Fortnite, and building its version of an interactive universe through gaming.

More consolidation will happen – eventually – among legacy media companies. But one major gaming acquisition could start a run in the industry.

Perhaps The Gaming Wars is the next chapter.

Disclosure: NBCUniversal is the parent company of Peacock and CNBC.

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May 10, 2023

Hollywood writers go on strike, saying they face ‘existential crisis’

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Hollywood writers are on strike for the first time in 15 years, halting production of TV shows and movies.

The Writers Guild of America announced Monday night its boards unanimously approved a strike effective 12:01 a.m. Tuesday. “Picketing will begin tomorrow afternoon,” the WGA said in a tweet Monday night.

The WGA said the decision was…

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May 1, 2023

Space Force chief says U.S. is facing a ‘new era’ of threats beyond Earth

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US Space Force General B. Chance Saltzman, Chief of Space Operations, testifies about the Fiscal Year 2024 Budget request during a Senate Armed Services Subcommittee on Strategic Forces hearing on Capitol Hill in Washington, DC, March 14, 2023. (Photo by SAUL LOEB / AFP) (Photo by SAUL LOEB/AFP via Getty Images)

Saul Loeb | Afp | Getty Images

When Gen. Chance Saltzman took the stage for his keynote at the Space Symposium in Colorado Springs, Colorado, this week, his message was simple: The U.S. is in a new era of space activity.

“The threats that we face to our on-orbit capabilities from our strategic competitors has grown substantially,” Saltzman, the U.S. Space Force’s second-ever chief of space operations, said in a CNBC interview after the speech. “The congestion we’re seeing in space with tracked objects and the number of satellite payloads, and just the launches themselves, have grown at an exponential rate.”

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“I want to make sure that we are thinking about our processes and procedures differently,” he said in an interview for CNBC’s “Manifest Space” podcast, his first broadcast interview since becoming the service’s highest-ranking military official last November.

The message comes at a key moment as space rapidly commercializes and a heightened geopolitical backdrop increasingly sees threats extending beyond Earth to a domain for which rules of engagement remain unclear.

Follow and listen to CNBC’s “Manifest Space” podcast, hosted by Morgan Brennan, wherever you get your podcasts.

Military experts say space is likely to be the front line in any future conflicts – a battlefield that could extend to the private sector and impact civilians in real time. Look no further than Russia’s invasion of Ukraine as an example: Recall the unprecedented cyberattack on the European communications network of U.S. satellite operator Viasat just as Russian soldiers mobilized to cross sovereign boundaries.

Saltzman said the space-based tactics of adversaries like Russia and China run the gamut, from the communications jamming of the GPS constellation; to lasers and “dazzlers” that interfere with cameras on-orbit to prevent imagery collection; to anti-satellite missiles like the one Russia tested in late 2021.

“We’re seeing satellites that actually can grab another satellite, grapple with it and pull it out of its operational orbit. These are all capabilities they’re demonstrating on-orbit today, and so the mix of these weapons and the pace with which they’ve been developed are very concerning,” he said.

It speaks to why, despite a wave of fervent debate, the Space Force was briskly stood up in 2019 as the first new branch of the U.S. armed services in seven decades.

To respond to evolving threats and secure space assets more quickly, Saltzman is looking to further augment the service’s capabilities to make satellite constellations more resilient and acquire more launch services by tapping into a burgeoning cadre of commercial space players.

Case in point: the Space Force’s recently announced procurement strategy for more launch services. The new “dual-lane acquisition approach” is intended to create more opportunities for rocket startups to compete for national security launch contracts.

With business to be awarded next year, the National Security Space Launch Phase 3 is estimated to run into the billions of dollars and is expected to draw bids from the likes of Rocket Lab, Relativity Space and Jeff Bezos‘ Blue Origin, among others. Phase 2 awards went to SpaceX and United Launch Alliance, a joint venture of Lockheed Martin and Boeing.

An expanding budget helps, too. While still just a fraction of the country’s overall defense budget, the Space Force’s $30 billion request for fiscal 2024 represents a 15% increase from this year’s enacted levels.

“This is a team sport and none of us is going to be successful going in alone,” Saltzman said.

“Manifest Space,” hosted by CNBC’s Morgan Brennan, focuses on the billionaires and brains behind the ever-expanding opportunities beyond our atmosphere. Brennan holds conversations with the megamoguls, industry leaders and startups in today’s satellite, space and defense industries. In “Manifest Space,” sit back, relax and prepare for liftoff.

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April 20, 2023

CNBC Daily Open: Earnings look weak despite beating expectations

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The Tesla Inc. Gigafactory stands in Shanghai, China, on Friday, Nov. 1, 2019.

Qilai Shen | Bloomberg | Getty Images

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

Markets were mostly flat Wednesday despite major companies reporting. Investors weren’t swayed by better-than-expected numbers.

What you need to know today

Tesla’s net income dropped 24% from the year-ago quarter to $2.51 billion, though its revenue rose 24% to $23.33 billion — despite six price cuts this year — surpassing estimates. Shares dropped 2.02% during market hours and a further 6.06% in overnight trading.

Morgan Stanley, like fellow investment bank Goldman Sachs, had a tough first quarter. Morgan Stanley’s earnings fell 19% from a year earlier to $2.98 billion, and its revenue slipped 2% to $14.52 billion. Still, both figures beat Wall Street’s expectations, boosting the bank’s shares 0.67%.

IBM’s first-quarter revenue rose just 0.4% from a year earlier to $14.25 billion, but its net income jumped a more drastic 26% to $927 million. That suggests the technology giant managed to improve margins. Investors cheered, pushing its shares up 1.61% in extended trading.

Sugar prices hit 24.37 cents a pound, an 11-year high. That’ll cause food prices to spike, analysts said, as many of processed items contain sugar. Worse, supply of sugar looks like it’ll remain constrained this year because of extreme weather, which means prices could increase further.

PRO Earnings reports from regional banks show that deposits are stabilizing. Investors were so bullish on one regional bank that they caused its shares to surge 24.12% on Wednesday.

The bottom line

Companies have been beating earnings estimates. The 44 companies in the S&P 500 that had reported earnings as of Tuesday night posted sales growth that was 2.2 percentage points better than expected and earnings that were 8 percentage points higher than forecast, according to Julian Emanuel at Evercore ISI.

Adding on to the optimism, the Cboe Volatility Index — a gauge of investor fear popularly known as the VIX — is near a 52-week low. In other words, investors think stock prices will rise over the next 30 days.

Yet the positive sentiment hasn’t seeped into broader markets. Of course, individual stocks have reflected companies’ financial health. IBM, for example, rose on the news that it managed to trim costs, while Netflix sank 3.17% because its earnings fell.

But the broader indexes have remained essentially flat. There are, in my opinion, two reasons for that.

First, even though companies have been reporting better-than-expected results, that trend could have low base expectations to thank: Analysts think S&P 500 earnings will fall 5.2% in the first quarter. But this has the effect of making earnings look better than they actually are. As CNBC Pro’s Scott Schnipper wrote, “Expectations about the immediate earnings outlook have been down for so long, the actual numbers themselves could look like up to investors.”

Second, fewer major companies gave forecasts for the year ahead. The lack of direction regarding their future earnings, coupled with a possible interest rate hike in the U.S. — which now seems more concrete after the U.K. reported yesterday that its inflation remained in the double digits — exacerbated investors’ uncertainty.

It appears that investors are already training their eyes on the Federal Reserve’s next meeting in May, rather than poring over last quarter’s earnings.

Subscribe here to get this report sent directly to your inbox each morning before markets open.

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April 19, 2023

CNBC Daily Open: Earnings are starting to look weak

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An aerial view of Tesla Shanghai Gigafactory on March 29, 2021 in Shanghai, China.

Xiaolu Chu | Getty Images News | Getty Images

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

Markets were mostly flat Wednesday despite major companies reporting. Investors weren’t swayed by better-than-expected numbers.

What you need to know today

Tesla’s net income dropped 24% from the year-ago quarter to $2.51 billion, though its revenue rose 24% to $23.33 billion — despite six price cuts this year — surpassing estimates. Shares dropped 2.02% during market hours and a further 4.19% in overnight trading.

Morgan Stanley, like fellow investment bank Goldman Sachs, had a tough first quarter. Morgan Stanley’s earnings fell 19% from a year earlier to $2.98 billion, and its revenue slipped 2% to $14.52 billion. Still, both figures beat Wall Street’s expectations, boosting the bank’s shares 0.67%.

IBM’s first-quarter revenue rose 0.4% from a year earlier to $14.25 billion, but its net income jumped a more drastic 26% to $927 million. That suggests the technology giant managed to improve margins. Investors cheered, pushing its shares up 1.61% in extended trading.

PRO Earnings reports from regional banks show that deposits are stabilizing. Investors were so bullish on one regional bank that they caused its shares to surge 24.12% on Wednesday.