U.S. stocks trade lower as Tesla, energy shares drag down equities

What’s driving markets

Sentiment was hit by a sharp slide in shares of Tesla Inc. after CEO Elon Musk suggested he was prepared to boost market share at the expense of profit margins as the company reported its results for the quarter ended in March.

“Tesla is operating in a highly competitive market, and its stock remains highly overvalued,” said David Trainer, chief executive officer of New Constructs, an investment research firm in Nashville. “The company is not immune to incumbents introducing EVs in masse or consumers less willing to spend on new vehicles in a slowing economy.”

“Worse yet, competition isn’t going away, as legacy automakers have ample resources and cash flow to invest in the EV market for years to come. Tesla faces an increasingly uphill battle to secure its competitive position, which makes its current valuation look even more unrealistic,” he wrote in emailed comments on Thursday.

Tesla’s troubles are just the latest example of how a lackluster start of earnings season has helped to dampen some of investors’ enthusiasm for U.S. stocks.

“The last few days household-name companies have disappointed, be it Tesla, Netflix and Goldman Sachs,” said Art Hogan, chief market strategist at B.Riley Wealth, during a phone interview with MarketWatch.

So far, results have put a spotlight on the waning ability of the U.S. consumer to continue propping up the U.S. economy.

“The main takeaway from earnings season so far is that consumer demand is weakening,” said Robert Schein, chief investment officer at Blanke Schein Wealth Management.

“Tesla and Netflix’s results are signposts for what’s to come, which is a cyclical decline in discretionary spending as consumers feel the squeeze. Tesla has been cutting prices for its cars and Netflix added fewer than expected subscribers,” Schein said.

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Several major automaker and electric vehicle stocks declined on Thursday. Shares of Ford Motor and General Motors were over 3% lower in the afternoon trading. Electric vehicle companies Rivian Automotive  and Lucid Group  fell 4.3% and 5.8%, respectively. European carmakers also stumbled, hurting benchmarks like Germany’s DAX 40 index

The news reminded investors of potential dangers lurking within the unfolding first-quarter earnings season.

Another batch of companies presented earnings on Thursday including AT&T Inc. Comerica Inc. Fifth Third Bancorp Union Pacific Corp. Phillip Morris International Inc. and American Airlines Group Inc. The regional banks shares retreated as lost deposits weighed on corporate earnings.

Intraday wobbles aside, U.S. equity benchmarks have moved little of late as traders wait to see if the S&P 500 can burst out of its five-month trading channel between 3,800 to 4,200.

“U.S. equity markets are firmly bottled up within the range and showing no momentum,” said the strategy team at Saxo Bank. Meanwhile, the Cboe Volatility Index or VIX, known as Wall Street’s “fear gauge,” was at 17 in recent trade, up slightly on the day but still not far from its lowest level of the year, reached earlier this week.

Adding to the caution are lingering concerns that tighter central bank policy will crimp economic growth.

On Thursday, investors received weekly jobless-claim data which showed applications for unemployment benefits rose by more than expected to 245,000. Meanwhile, the Philadelphia Fed said Thursday its gauge of regional business activity slumped to negative 31.3 in April from negative 23.2 in the prior month. 

March existing home sales offered more dismal news about the U.S. housing market as sales fell by nearly 1% last month, the largest year-over-year decline in a decade. A gauge of leading economic indicators signaled a recession would likely arrive in the U.S. by mid-year.

The latest economic data seems to be breaking the Federal Reserve’s way, with cooling of both inflation and the labor market, New York Fed President John Williams said late on Wednesday.

Companies in focus

• AT&T Inc. stock tumbled 10.1% on Thursday after the telecommunications giant reported first-quarter beat profit expectations but fell short on free cash flow.
• The S&P 500 Energy Sector was the worst performer in the large-cap index on Thursday, as oil prices dropped nearly 2%. Shares of APA Corporation and ConocoPhillips were down 2.8% and 1.9%, respectively.
• Shares of American Express Company declined by 1.5% despite its first-quarter earnings showing the firm continued to benefit from strong spending growth with particular momentum in the travel and entertainment categories.
• Shares of Las Vegas Sands Corp. jumped 5.6% after the company reported quarterly revenue that surpassed Wall Street estimates. The Las Vegas-based casino operator said its traffic is rebounding in Singapore and Macao, while expecting further improvement in travel and tourism spending from China and Hong Kong as airline and ferry capacity rebounds.

—Jamie Chisholm contributed to this article.