Awaiting the "A-Team": Amazon and Apple Prepare to Report as Market Digests a Mixed Earnings Picture, Above-Expectations GDP

(Thursday Market Open) Get ready for a ride with the “A-Team.” Nope, that’s not a reference to a 1980s TV show. We’re talking about this afternoon when Apple AAPL and Amazon AMZN report their latest results, making this one of the most important days of earnings season.

Early in the day, U.S. markets presented a mixed picture with more pressure on tech following weak earnings from Meta META. The European Central Bank raised rates 75 basis points, as analysts had expected.

A little data housekeeping before we get to earnings:

The first government estimate for U.S. Q3 Gross Domestic Product (GDP) was 2.6%, above Wall Street’s 2.3% consensus, and the prices component moderated slightly. The data appeared to give some of the major indexes a boost in pre-market trading.

Weekly initial jobless claims of 217,000 were slightly below expectations, but continuing claims jumped, which may be helpful to those hoping for a slowdown that makes the Federal Reserve take notice. September Durable Orders also looked a bit softer than expected, with the non-defense capital goods component falling 0.7%. That category is a proxy for business investment.

Apple and Amazon Preview

AAPL and AMZN earnings could provide insight on:

• How rising rates have affected business customers in their cloud and PC businesses.
• How the potential impact of a slowing global economy will affect consumer demand.    
• How China’s continued COVID-19-related shutdowns affect demand and production in that huge economy.

The obvious focus will be on AAPL’s iPhone sales and AMZN’s cloud business. People want to hear the latest on iPhone 14 sales after AAPL launched that product late last quarter.

After disappointing results from Microsoft MSFT and Alphabet GOOGL earlier this week, the question is whether AMZN and AAPL are also feeling pain from signs of a slowing economy. MSFT’s cloud business growth slowed, and GOOGL’s YouTube ad revenue fell. Both developments suggest struggles among the global businesses that use the cloud and advertise online, and their struggles might be due to higher interest rates. AAPL and AMZN executives may be able to provide insight into exactly what sort of pain their business customers feel.

They can go beyond that with a look at consumers because both feed heavily off consumer demand. The holiday season is almost upon us. How do AMZN and AAPL feel it’s shaping up? AMZN cut staff earlier this year, which some analysts saw as a negative signal about the coming holiday season.

Then there’s China. Some U.S. consumer firms like Nike NKE struggled recently with demand there, and rising geopolitical tensions between China and the United States could be exacerbating that. The foreign exchange picture, with currencies in China and Japan losing ground versus the dollar, could put multinational companies like AAPL and AMZN in a bind. And how do the recent Biden administration export controls on semiconductor chips affect AAPL, whose devices depend heavily on a ready supply of those products?

AAPL hasn’t provided much guidance lately, but look for any kind of picture either company paints about the coming quarter and next year. Does either giant buy into the idea of a global recession? Economic outlook comments from their executives have moved the market in the past.

Earnings Nuggets

This morning and last night featured a potpourri of earnings from across the sector landscape. Here’s our quick take on each major company that reported:

Meta (META): Disappointing all around. The key takeaway is that the business is turning out to be more capital intensive than some had expected, and that’s showing up in META’s incredible expense numbers. People traditionally have liked the tech space because it doesn’t require such heavy investment. it’s not so capital-intensive. Also, the metaverse isn’t going to be a thing anytime soon. Shares are down sharply.

Shopify (SHOP): This e-commerce platform had a smaller loss than expected and offered in their guidance that their expense growth rate should start coming down a bit. It looks like they’re taking some positive steps. Shares are up a little bit.

Ford (F): They talked about parts shortages hitting some vehicle sales and $1 billion in unexpected supplier costs. They’re also getting rid of their autonomous driving unit, which could mean an expense. It wasn’t the best report for F after a good one from General Motors (GM), which was able to solve some of its supply chain problems.

Caterpillar (CAT): It’s a pretty good earnings report that showed surprisingly good growth across all business units and improved profitability despite CAT’s exposure to China and the slowdown there. CAT might be getting help from higher commodity prices that pushed more investment toward machinery.

McDonald’s (MCD): Shares are up after the company beat estimates on top and bottom lines. The fast food giant was able to increase same-store sales and raise prices. Like a lot of staples companies, it looks like MCD was was able to pass prices on to customers and not have a significant hit in demand, which is a positive sign. There was pretty solid EU performance, but China was negative in terms of same-store sales. The company increased its dividend.

Potential Market Movers

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 economic slowdown that’s being felt in almost every sector. This was cited in Texas Instruments (TXN) earnings when the CEO noted deteriorating demand in nearly every sector in the economy, specifically calling out “expanding weakness across industrial.”

When you think of “industrial,” Boeing (BA) definitely comes to mind, and its earnings significantly missed expectations. Earnings from other industrials like Caterpillar (CAT) this morning and Deere (DE) next month could reveal more about how rising costs may be hitting the industrials sector.

Should the soft META and GOOGL results have investors worried about AAPL and AMZN later today? Perhaps a bit, but remember, these companies don’t share too much in common other than their “tech” pedigrees. The cloud, consumer products, and iPhone businesses (which drive AMZN and AAPL) aren’t dependent on internet advertising the way GOOGL and META are.

Curiously, the Cboe Volatility Index® (VIX) keeps sliding despite the shaky tech market. That might be a sign that there’s not a huge commitment behind this selling. The VIX remained below 28 yesterday, and the 10-year Treasury yield (TNX) dropped to 4%.

Reviewing the Market Minutes

The three-day win streak for major indexes is history. The Dow Jones Industrial Average ($DJI) eked out a tiny 0.1% gain to 31,839.11 yesterday, but the S&P 500® index (SPX) fell 28.5, or 0.74%, to 3,830.60, still above old resistance at 3,800. The Nasdaq-100® (NDX) took a huge hit, falling more than 2% as it got rattled by MSFT and GOOGL.

Interestingly, the Russell 2000® (RUT) kept moving higher and pushed through its 50-day moving average. The RUT contains many U.S. stocks with less exposure to overseas currency and geopolitical troubles. Its strength lately, outperforming all other indexes over the last month, could hint that investors are looking for smaller and more domestic stocks, the Wall Street equivalent of a craft brew.

CHART OF THE DAY: TECH GETS SCORCHED. This sector heat map shows how the four major market indexes (from left to right, the S&P 500, Dow Jones, Nasdaq-100, and Russell 2000) were affected Wednesday by component. The bigger the company, the bigger the square. Green means the stock price is up, and red means it’s down. The more intense the color, the larger the price move. As you can see, the NDX got hit the hardest from weak tech earnings, as those stocks make up a huge percentage of its overall market cap. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Turning Up the Volume: As we look back on the market’s first “three-peat” since early September, it’s even more encouraging that some recent sessions featured higher-than-normal volume. Sometimes the market has a nice run and people get excited, but it’s in low-volume trading that signals lack of commitment. That hasn’t been the case this week. The rallies are backed by heavy trading, and some of the leading stocks are the mega-caps that exert lots of influence on the major indexes.

All this could be positive for the days ahead, or it could mean nothing. But it does suggest there’s some true buying interest out there, perhaps from more of the big players like mutual funds and endowments. The question is whether that enthusiasm can continue in the wake of disappointing mega-cap earnings reports.

Rechecking Guidance: Per our conversation yesterday, guidance could outweigh results for many companies in terms of market impact. So how did the rest of the guidance scorecard look for companies reporting Tuesday night and Wednesday morning? A back-of-the-envelope calculation looks like this:

• 12 companies raised guidance.
• 13 companies kept guidance unchanged.
• 14 companies lowered guidance.
• 18 companies offered mixed guidance (good and bad).

For our purposes, we’ll call “unchanged” guidance a victory in the current tough climate. Leaving out companies that aren’t offering clearly bad or good guidance (the mixed ones), we have 25 companies raising their outlook or keeping it unchanged versus 14 that lowered their outlook. That’s not quite a 2-to-1 ratio, but investors would likely be happy if that kind of daily scorecard continues.

Recession Indicator du Jour? The Wall Street Journal reported this week that September saw the highest number of monthly departures of chief financial officers (CFOs) in S&P 500 companies since the start of the year, equal to about 20% of all Q3 resignations. That compares to 8% a year ago. A new c-suite version of quiet quitting, perhaps? Numbers from executive search firm Russell Reynolds suggest it’s more about a talent pool shift for tougher times ahead. The Journal pointed out that as earnings season continues, recession fears are “pushing some executives to make a move now before the labor market changes,” and some companies are specifically asking for CFOs with specific experience in cost-cutting or restructuring operations. More than half of earnings season is still ahead, meaning plenty of time for possible executive change announcements. These can often have an impact on stock prices, so keep an eye on who’s staying and who’s going.

Notable Calendar Items

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 Report and earnings from Hershey (HSY), Cardinal Health (CAH), and Duke Energy (DUK)

Nov. 7: September Consumer Credit and earnings from Palantir (PLTR), Lyft (LYFT), and BioNTech (BNTX)

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

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