Wednesday's Market Minute: The Bearish Baton Passes to Earnings

Stocks have shown an impressive amount of resilience since rallying in the wake of CPI almost two weeks ago. Bulls are buying dips despite hot inflation, a new high in the 10-year yield, Tesla TSLA at a new low, and some wild geopolitical events. Now, the rubber meets the road. 

Microsoft MSFT, Google GOOGL, and Texas Instruments TXN are dragging Nasdaq futures back to where they were before Tuesday’s big rally. It’s a good reminder that inflation is not the stock market’s only challenge. Investors must remember the bear market began 11 months ago almost to the day when Microsoft and Salesforce (CRM) peaked around these same seasonal earnings. Growth is decelerating rapidly at American tech giants in the post-COVID world, which is why some like Meta META are throwing a Hail Mary to sustain the impossible standards set by investors who paid record prices for equity at the peak of the bubble. 

Revenue is peaking at most tech companies at the same time costs are rising – not just by way of interest rates on debt, but the natural progress of the economy that’s pushing the cost of labor and input goods higher. Inflation’s obviously an issue, but it wouldn’t be as bad if adoption of tech goods and services were still booming. The problem is that any business that needed remote work capability, virtualization, cloud access, data storage or e-commerce solutions, has obtained it. So, too, have we as individuals maxed out our gadgetry, entertainment, and computing ability at home thanks to Quarantine. 

The next phase for tech companies is charging us for all the stuff we now can’t live without. The best companies will cement their roles as our new consumer and industrial staples, and entice investors with fat dividends instead of scalding growth. The weak will go bankrupt, get bought, go private, or merge. Judging by the quality of companies still trading in the public market, we’re barely in the first inning.

Corporate profits are as big or bigger a bear case than the Federal Reserve, but it’s not quite as easy to follow on a chart as the overnight interest rate, so it isn’t talked or meme’d about quite as much. It’s also a more inconvenient, discouraging truth that many don’t want to accept, and so it’s not the driving narrative of why stocks are under pressure. If we can rally even as this truth comes to light, bulls have more fight in them than I thought, and we could be in store for a very big bounce. But the reality is that productive destruction in the tech industry is just getting started.

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