(Wednesday Market Open) Bullish investors are in a conundrum. On the one hand, they want to see data signaling  economic slowdown, hoping that will convince the Federal Reserve to eventually take its foot off the brake.

On the other, they seem disappointed with yesterday’s mega-cap info tech earnings stumbles from Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOGL). Guidance from MSFT looked weak, and GOOGL’s quarter missed Wall Street’s expectations. Both of those companies and the entire tech sector came under pressure early this morning, threatening a three-day winning streak by the major stock indexes.

Here’s the problem: investors can’t have it both ways. Those rooting for weak economic data in hopes of a Fed pause may have to accept that a slowdown is likely to have a negative impact on companies across the spectrum, including mega-caps like MSFT and GOOGL. If company earnings suffer, so will the major indexes. Especially if the companies we’re talking about have $1 trillion market caps.

Right now, it looks like tech and growth sectors in general are getting hit hard but the rest of the market appears somewhat shielded. The Nasdaq-100® (NDX) fell nearly 2% ahead of the opening bell. But Boeing (BA) and Kraft Heinz (KHC), both of which reported this morning with BA disappointing and KHC coming in above expectations, are doing OK so far.

Microsoft and Alphabet Redux

It hasn’t been a good 24 hours for earnings, and while the individual stories have not been good, the macro picture so far is in line with what some investors had feared going into this earnings cycle. The tough comparable numbers from 2021 make it hard not to feel concerned. For instance, GOOGL reported its slowest growth since 2013 as revenue growth dropped to 6%. It was 41% at this time a year ago. 

Neither of yesterday’s post-market earnings behemoths delivered super-positive quarters. MSFT’s earnings per share beat estimates by a few pennies, but revenue was about where analysts had expected, and GOOGL pulled up short in both categories. It’s especially concerning to see GOOGL’s revenue come in lighter, although it was up from a year ago. Lighter ad revenue from YouTube weighed on GOOGL, and shares plunged 7% after the close.

This was the first time that ad revenue fell for YouTube since GOOGL began breaking it out separately, so maybe those cat videos aren’t attracting the usual viewership. On the GOOGL cloud side, revenue grew but the operating loss widened to $699 million.

MSFT had a deceleration in cloud growth, but when you decelerate and growth is still 42% year-over-year, that’s not necessarily a disaster. The cloud revenue helped offset a slowdown in the PC market.

From a broader standpoint, it’s not good for the info tech sector if MSFT and GOOGL are harbingers of what’s to come as more tech companies report. Also, the softness occurred just a day after weak PMI data, so maybe that speaks to an overall manufacturing slowdown that’s hurting tech and possibly other sectors. Shares of Meta Platforms (NASDAQ: META), which is scheduled to report later today, fell ahead of the open.

Two interesting earnings trends to think about today:

• Big staples companies appear to still have pricing power, meaning they can raise prices and customers won’t go elsewhere. KHC was an example today, and Coca Cola KO and Procter & Gamble PG were examples earlier in earnings season. A lot of the growth at KHC was due to higher prices, not people deciding to buy more ketchup and cheddar cheese.
• The rate hikes are hurting tech companies, even in places like internet advertising where things seemed somewhat safe. For example, all those mortgage and insurance companies that advertise online are feeling the impact of rising rates, and that’s slowing their ad spending. That hits companies like GOOGL right where it smarts.

Potential Market Movers

Falling Treasury yields provided the main boost yesterday, and their direction likely determines where things go today. The 10-Year Treasury yield dropped to 4.1% by late Tuesday, its lowest level in a week. This likely reflects perceptions of some sort of Fed rate hike slowdown. Odds are now about even between a 50-point and a 75-point hike in December, versus 64% chances of a 75-basis point hike a week ago, according to the CME’s FedWatch tool. There’s still a 40% chance, however, of rates being 5% or higher by mid-2023, the tool says.

Barring some sort of major news between now and the Federal Open Market Committee (FOMC) meeting next week, these odds don’t seem likely to change much. That means rates might not have a lot more give before the meeting, either, though that remains to be seen. Weak demand in a government 2-year Treasury auction Tuesday might also be a barrier to yields falling much further.

Data to watch include the first look at Q3 Gross Domestic Product (GDP) tomorrow morning, and September Personal Consumption Expenditure (PCE) prices, a key inflation indicator, on Friday.

Meta reports after the close today, and Amazon (AMZN) and Apple (AAPL) step to the plate after tomorrow’s close. With AAPL, iPhone sales will get a close look for signs of any slowdown as the global economy weakens. AMZN’s cloud business will be under scrutiny after MSFT’s revenue growth in that category decelerated.

Keep an eye on the Cboe Volatility Index® (VIX) today. It fell below 29 on Tuesday for the first time since October 6. It hasn’t been below 28 since September 23, or below 25 since September 13.

Technically, the close above 3,800 on Tuesday by the S&P 500® index (SPX) might have been meaningful, breaking above the recent trading range. However, follow-through buying wasn’t in evidence after the close.

Reviewing the Market Minutes

For the first time since early September, we have a three-peat. The major indexes rolled up hefty gains Tuesday and haven’t finished in the red since last Thursday.

The S&P 500® index (SPX) climbed Tuesday by 61.77, or 1.63%, to 3,859.11 The Dow Jones Industrial Average ($DJI) rose 337.12, or just over 1%, to 31,836.74.

The Nasdaq-100® (NDX) outdid both the others, rising 2.1%, while the Russell 2000® (RUT) took Tuesday’s trophy with a 2.73% climb.

On the sector front, some of the more defensive areas had the worst performance of the day. Health care and staples were down near the bottom of the list. Real estate led everyone, and materials kept up its recent solid returns.

Three Things to Watch

What’s the Outlook? If you’ve been surprised this quarter when a company’s shares rise after it misses Wall Street’s earnings projections, make sure you’ve checked the guidance. In any given quarter, forward projections can have more market impact than results because the market always focuses on the future. This quarter that’s arguably truer than ever, because so many investors worry the economy could be on the verge of recession as interest rates climb. Whenever a major company issues guidance that matches or exceeds its previous outlook, that defuses the recession narrative. And when some of the largest companies by market cap and revenue say the road ahead doesn’t end in a cliff, that reassures the market.

 

Guidance Scorecard: An early rally Tuesday underscores the points above.  Two benchmark U.S. companies—Coca-Cola (KO) and General Motors (GM)—raised or stuck to their prior outlooks despite the inflation and interest rate storms they face. It’s worth keeping track of the overall guidance picture as earnings keep coming in. FactSet is one organization that compiles it weekly. Tuesday morning’s guidance scorecard looked like this, according to Briefing.com.

• 15 companies with unchanged or better projections compared with their previous outlook.
• Five companies lowering outlooks.
• Two companies with mixed guidance.

Not bad, really. Overall, the guidance picture so far has been better than expected. Everyone forecast doom and gloom, but that hasn’t been a universal theme by any means in the reports we’ve seen.

Crude Stays in Lane: If you’re a regular reader (thanks!), maybe you noticed we haven’t mentioned WTI Crude oil (/CL) much lately. That’s because unusually for crude, it’s been pretty flat. Prices spiked a couple weeks ago when OPEC+ cut its output goals, then pulled back quickly thanks in part to a stronger dollar that makes crude more expensive overseas and the Biden administration continuing to release oil from the Strategic Petroleum Reserve (SPR). The balancing act on supply kept WTI in a tight range between about $82 and $86 per barrel over the last week. Looking ahead, CME futures continue to be in backwardation, meaning the front-month contract is higher than latter months. This is partly seasonal since U.S. crude demand generally falls in winter. It could also reflect recession fears, as a slowing global economy could drive down demand for crude.

One thing that could get in the way of the lower price picture (besides obvious stuff like geopolitical tension), is the Biden administration’s vow last week to start refilling the SPR once crude prices fall back toward $67 to $72. This was almost like a warning to the market that $70 or thereabouts might represent a near-term low, if we get down there. The government is potentially a huge buyer and could easily support prices wherever it steps in. This is also something to contemplate if you have a mind to invest in oil companies, which would be the beneficiaries if Uncle Sam steps in.

Notable Calendar Items

Oct. 27: Q3 gross domestic product, September Durable Goods, and earnings from Apple (AAPL), McDonald’s (MCD), Caterpillar (CAT), MasterCard (MA), Southwest (LUV), Merck (MRK), and Altria (MO)

Oct. 28: September Personal Income, Personal Spending, Personal Consumption Expenditure (PCE) prices, October Consumer Sentiment, and earnings from AbbVie (ABBV), Aon (AON), Chevron (CVX), and ExxonMobil (XOM)

Oct. 31: Happy Halloween! October Chicago PMI and earnings from CNA Financial (CNA), Goodyear Tire (GT), and Stryker (SYK)

Nov. 1: Start of the FOMC meeting, September Construction Spending, the October ISM Manufacturing Index, and earnings from Abiomed (ABMD), DuPont (DD), Eli Lilly (LLY), Pfizer (PFE), Uber (UBER), Advanced Micro Devices (AMD), and Under Armour (UAA)

Nov. 2: FOMC rate decision and earnings from Allstate (ALL), CVS Health (CVS), Yum Brands (YUM), and Zimmer Biomet (ZBH)

Nov. 3: September Trade Balance and Factory Orders and earnings from Exelon (EXC), Hyatt Hotels (H), Illumina (ILMN), Kellogg (K), Penn Entertainment (PENN), and Marriott (MAR).

Nov. 4: October Nonfarm Payrolls and earnings from Hershey (HSY), Cardinal Health (CAH), and Duke Energy (DUK).

TD Ameritrade® commentary for educational purposes only. Member SIPC.

 

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