One of the pillars of behavioral economics is the so-called prospect theory, the idea that the pain of a loss is far greater than the expectation of a gain. That insight, developed by Daniel Kahneman , winner of the 2002 Nobel Memorial Prize in Economic Sciences, was very much in evidence on Thursday as the S & P 500 dropped 100 points in the final two hours and thirty minutes of trading. On Thursday, President Joe Biden spoke with Israel’s Prime Minister Benjamin Netanyahu, calling for an immediate ceasefire in Gaza and more protection for aid workers. News reports that Israel was preparing for possible retaliation from Iran also surfaced. Bond prices rose, yields declined, and oil rallied . Later in the day, Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, said that if inflation continues to move sideways, then he wondered whether the Fed should cut rates at all this year. Despite Thursday’s declines, the S & P 500 is only 2% from last week’s record highs. The surprise isn’t that the S & P 500 dropped Thursday. It’s that it’s been so steady The S & P 500 has been on an upward path for a remarkable five straight months, largely because earnings expectations for the first quarter and this year have been very stable. .SPX 6M mountain S & P 500, 6 months First-quarter earnings estimates for the S & P 500 have slipped to an expected gain of 5.1%, down from an anticipated increase of 7.2% on Jan. 1, according to LSEG. The decline is not surprising given that estimates usually start high at the beginning of the quarter, and fall somewhat at the very end of the quarter. Reported earnings then typically beat the lower analyst estimates, usually by 3% to 6%. John Butters, senior earnings analyst at FactSet, confirmed that analysts have made smaller cuts than average to first-quarter estimates. What would cause a more serious drop in stocks? Since earnings are what ultimately moves stocks, the question is not “What would cause a modest 2% to 5% decline?” Everyone should expect that, given the gains. Rather, we should ask, “What would cause a bigger decline of 10% or more?” To do that, market participants would need to believe that earnings estimates were off significantly. What would cause a significant drop in earnings? It would typically be some combination of factors: 1) an expectation of a notable decline in the economy, particularly in jobs, 2) a notable and sustainable spike in interest rates, and 3) some kind of unexpected exogenous shock (for example: the Arab oil embargo of the 1970s, Covid or war). The first two are not happening, at least not yet. Job growth remains strong — we will see how the March payrolls turn out. Further, there is no sustained spike in rates — for the time being. An exogenous shock? Reports that Israel was preparing for possible retaliation from Iran seemed to take the markets by surprise Thursday. What about the current bugaboo, so-called “sticky inflation?” Unfulfilled expectations of rate cuts may take some of the air out of the market, but it seems unlikely that the market would drop 10% just on that alone. Not without a significant deterioration in the economy. A 10% drop in the market is more common than you think If you think a 10% drop in the market is unlikely or would be a catastrophe, neither would be the case. Market declines of 10% or more are very common. It turns out, investors worry a lot about economic weakness or exogenous shocks and how they might affect earnings. A 2022 study from Charles Schwab looked at stock market declines over from 2002 to 2021. The analysis found that a decline of at least 10% occurred in 10 out of 20 years, or 50% of the time, with an average pullback of 15%. “Despite these pullbacks, however, stocks rose in most years, with positive returns in all but 3 years and an average gain of approximately 7%,” the report said. So buckle up. People who think notable declines are uncommon suffer from recency bias: Because the market has gone almost straight up for the past 18 months, they think that is the natural direction for stocks for the foreseeable future. They would be mistaken.
Check out the companies making headlines before the bell. Cisco Systems — The networking technology stock added nearly 2% on the heels of a Citi upgrade to buy from neutral. Citi said artificial intelligence can become a bigger part of the business over time. Novocure — Shares soared roughly 22% after the U.S. Food and Drug Administration approved Novocure’s Optune Lua wearable treatment for metastatic non-small cell lung cancer. Morgan Stanley — Shares gained more than 3% after the bank reported quarterly results before the bell that beat Wall Street’s forecasts, helped by higher-than-expected revenue from its wealth management, trading and investment banking operations. The firm’s earnings came in at $1.88 per share, versus the $1.58 expected by a LSEG analyst poll. Revenue was $15.38 billion versus the $14.41 billion consensus estimate. United Airlines — Shares rose about 1% after the airline beat earnings and revenue expectations for the third quarter. United also announced a $1.5 billion share buyback, its first since before the pandemic. ASML — Shares of the Dutch chip equipment firm slid 4% before the bell, adding to Tuesday’s losses after it accidently released its third-quarter results a day early . The report was disappointing as ASML cut its 2025 sales forecast, suggesting weakness in markets other than those that serve AI applications. J.B Hunt Transport Services — Shares jumped more than 7% after the company’s third-quarter results topped expectations. J.B. Hunt posted $1.49 earnings per share on $3.07 billion of revenue. Analysts polled by LSEG had forecast earnings of $1.41 per share on $3.02 billion of revenue. The company said demand for its intermodal service rose throughout the quarter. — CNBC’s Sean Conlon, Alex Harring, Sarah Min, Michelle Fox and Hakyung Kim contributed reporting.
Ted Pick, CEO Morgan Stanley, speaking on CNBC’s Squawk Box at the World Economic Forum Annual Meeting in Davos, Switzerland on Jan. 18th, 2024.
Adam Galici | CNBC
Morgan Stanley topped analysts’ estimates for third quarter profit as its wealth management, trading and investment banking operations generated more revenue than expected.
Here’s what the company reported:
Earnings:$1.88 a share vs $1.58 LSEG estimate
Revenue: $15.38 billion vs. $14.41 billion estimate
Morgan Stanley had several tailwinds in its favor. The bank’s massive wealth management business was helped by high stock market values in the quarter, which inflates the management fees the bank collects.
Investment banking has rebounded after a dismal 2023, a trend that may continue as easing rates will encourage more financing and merger activity.
Finally, its Wall Street rivals have posted better-than-expected trading results, making it unlikely that the firm missed out on elevated activity.
Chinese e-commerce company Alibaba has invested heavily in its fast-growing international business as growth slows for its China-focused Taobao and Tmall business.
Nurphoto | Nurphoto | Getty Images
BEIJING — Chinese e-commerce giant Alibaba‘s international arm on Wednesday launched an updated version of its artificial intelligence-powered translation tool that, it says, is better than products offered by Google, DeepL and ChatGPT.
Alibaba’s fast-growing international unit released the AI translation product as an update to one unveiled about a year ago, which it says already has 500,000 merchant users. Sellers based in one country can use the translation tool to create product pages in the language of the target market.
The new version is based only on large language models, allowing it to draw on contextual clues such as culture or industry-specific terms, Kaifu Zhang, vice president of Alibaba International Digital Commerce Group and head of the business’ artificial intelligence initiative, told CNBC in an interview Tuesday.
“The idea is that we want this AI tool to help the bottom line of the merchants, because if the merchants are doing well, the platform will be doing well,” he said.
Large language models power artificial intelligence applications such as OpenAI’s ChatGPT, which can also translate text. The models, trained on massive amounts of data, can generate humanlike responses to user prompts.
Alibaba’s translation tool is based on its own model called Qwen. The product supports 15 languages: Arabic, Chinese, Dutch, English, French, German, Italian, Japanese, Korean, Polish, Portuguese, Russian, Spanish, Turkish and Ukrainian.
Zhang said he expects “substantial demand” for the tool from Europe and the Americas. He also expects emerging markets to be a significant area of use.
When users of Alibaba.com — a site for suppliers to sell to businesses — are categorized by country, developing countries account for about half of the top 20 active AI tool users, Zhang said.
Chinese companies have increasingly looked abroad for growth opportunities, especially e-commerce merchants. PDD Holdings‘ Temu, fast fashion seller Shein and ByteDance’s TikTok are among the recent global market entrants. Many China-based merchants also sell on Amazon.com.
Zhang declined to share how much the updated version would cost. He said it was included in some service bundles for merchants wanting simple exposure to overseas users.
His thinking is that contextual translation makes it much more likely that consumers decide to buy. He shared an example in which a colloquial Chinese description for a slipper would have turned off English-speaking consumers if it was only translated literally, without getting at the implied meaning.
“The updated translation engine is going to make Double 11 a better experience for consumers because of more authentic expression,” Zhang said, in reference to the Alibaba-led shopping festival that centers on Nov. 11 each year.
Alibaba’s international business includes platforms such as AliExpress and Lazada, which primarily targets Southeast Asia. The international unit reported sales growth of 32% to $4.03 billion in the quarter ended June from a year ago.
That’s in contrast to a 1% year-on-year drop in sales to $15.6 billion for Alibaba’s main Taobao and Tmall e-commerce business, which has focused on China.
Nomura analysts expect that Alibaba’s international revenue slowed slightly to 29% year-on-year growth in the quarter ended September, while operating losses narrowed, according to an Oct. 10 report. Alibaba has yet to announce when it will release quarterly earnings.