Microsoft's Gloomy Guidance, Boeing's Surprise Q4 Loss Pulls Market Lower

(Wednesday Market Open) The market gives and the market takes away.

That’s the lesson Microsoft MSFT shareholders learned since Tuesday’s closing bell. Shares of the mammoth tech company initially bounced more than 3% on solid cloud business results for the December quarter, only to retreat ahead of today’s opening bell as investors digested the company’s weak performance in other areas and what looked like less-than-stellar cloud growth guidance (see more below).

Boeing BA was another mammoth company whose earnings disappointed, and premarket investors apparently saw that combination as a bit too much for a market that was already pulling back yesterday from its January rally. Stock index futures lost ground before the open, while fixed income markets bounced as it looks like cautious trading may be the theme of the day.

Today is likely to be about looking ahead to tomorrow’s Gross Domestic Product (GDP) data and continuing to digest earnings. Yet while it’s easy to see why the market is down after a titan like MSFT reports, remember that its share losses aren’t massive. It takes a lot more than slightly negative guidance to dramatically move a leader.

Morning rush

• The 10-year Treasury yield (TNX) fell 3 basis points to 3.43%.
• The U.S. Dollar Index ($DXY) slipped to 101.9.
• Cboe Volatility Index® (VIX) climbed to 20.09.
• WTI Crude Oil (/CL) rose 0.1% to $80.24 per barrel.

Just in

This morning’s earnings parade is a bit shorter than yesterday’s. Still, a few important companies did open their books:

Abbott Labs ABT: The medical company saw shares fall more than 2% ahead of the open despite beating Wall Street’s consensus estimates for both earnings per share (EPS and revenue. It also issued fiscal 2023 guidance that was in line with the street’s estimates.

Boeing BA: Shares lost altitude in premarket trading after the jet maker reported a Q4 loss of $1.75 per share. Analysts had expected a profitable quarter. Revenue rose 35% year over year but still missed analysts’ average estimate. BA did reaffirm previous guidance, but said it has “more work to do” to drive stability in its operations and within its supply chain.

AT&T T: Shares rose in premarket action after the telecommunications company beat Wall Street’s EPS estimates and reported revenue in line with expectations. T reported free cash flow of $14.1 billion in 2022, beating expectations. As Barron’s noted today, free cash flow is an important metric for T because many investors there appreciate the company’s dividends and the cash flow that funds them.

Tesla Up Next; Get set after the close for Tesla (NASDAQ: TSLA). Recently, TSLA announced a dramatic price decrease across its product line after another tough year for electric vehicle (EV) manufacturers and the auto industry as a whole, but Wall Street analysts generally remain optimistic about TSLA’s stock. In case you missed it, here’s a preview of TSLA and the electric vehicle industry’s earnings.

Consensus for TSLA earnings:

Expected Q4 EPS (analysts’ consensus): $1.13

Expected year-over-year EPS change: +32.9%

Catch a Flight: Consider tomorrow airlines day with expected earnings from American Airlines AAL, Southwest LUV, and Alaska Air (ALK). Travel’s been a hot sector lately thanks to sizzling travel demand, with upbeat results last week from United Airlines UAL.

The LUV earnings report, however, is expected to reflect the severe weather and staff turmoil that led to more than 16,700 canceled flights and costs of up to $825 million over the holidays. On January 6, the Dallas-based carrier told the SEC that it plans to report a Q4 net loss, and its earnings call could offer more detail on how it plans to avoid future troubles that left so much egg on its face.

Cloudy outlook for Microsoft

Tuesday’s main storyline from Microsoft’s MSFT earnings was that the cloud segment rebounded. Most notably, its Azure platform posted a 31% rise in revenue, and MSFT initially rose 3% in premarket trading after those headlines.

Then reality hit.

With cloud a prime focus since many companies cited slower business demand in the fall, investors apparently took a closer look at MSFT’s expectations. The tech giant said it expects growth of 17% to 19% for its intelligent cloud business in quarter ending in March with a deceleration in Azure’s growth rate. The 17% to 19% growth would put intelligent cloud revenue below Wall Street’s expectations.

Also, looking back at the last quarter, MSFT also came in on the low end of revenue estimates and saw a slowdown in a lot of its business units, including a big revenue drop in the More Personal Computing segment.

MSFT said in October it expected fiscal Q2 revenue of between $52.4 billion and $53.4 billion. The company ended up reporting $52.75 billion, below the average Wall Street estimate but in line with its guidance. That represented just a 2% increase from a year ago, and that’s likely to be a continuing story for info tech companies as earnings season advances. Analysts expect many of the biggest tech firms to take in less revenue in Q4 than a year earlier.

MSFT’s earnings of $2.32 per share were slightly above the average Wall Street view of $2.29, so that was good to see. But it was down from $2.48 a year ago.

Comparisons across the tech sector could improve as the year moves along. Right now, it’s tough for tech companies because they’re being measured against 2021, a huge year for demand.

Data docket

Tomorrow morning brings the government’s first look at Q4 Gross Domestic Product (GDP). Consensus from Briefing.com projects 2.6%, a bit of a slowdown from 3.2% in Q3.

GDP is a backward-looking report, but Thursday’s initial government estimate before the open could draw closer scrutiny than usual from Wall Street. The Fed’s been throwing everything it can at the economy, trying to slow inflation. A higher-than-expected GDP reading would likely raise concerns the central bank might have to get even more aggressive.

One aspect to watch beyond headline GDP is its personal spending component, which rose to 2.3% in the final Q3 report, up from the second estimate of 1.7%. For a long time, investors could assume that when weaker economic news arrived, the Fed would take its foot off the brake and hit the accelerator. That’s changed, judging from the market’s poor reaction to last week’s December Retail Sales data. It’s also likely a drop in personal spending from Q3 could get the fisheye from investors, so carefully watch the report’s price metrics for signs of progress against inflation.

Reviewing the market minutes

The S&P 500® index (SPX) entered Tuesday on a two-day rally with technical support seen at 4,015 and 4,000. Early in Tuesday’s session, it dropped under both those levels, bottoming at 3,989, before rebounding around midmorning and trading in a tight range the rest of the day.

Some of the early softness might’ve reflected a reported issue at the New York Stock Exchange (NYSE), so it’s hard to say if performance reflected actual investor sentiment or if it was related to a brief trading halt in many well-known stocks.

After that all got sorted out, the SPX’s 4,016 close on Tuesday, just above the first level of support, looked constructive on the charts. So did its push through a technical downtrending line (see chart below), which it stayed above Tuesday. That’s impressive when you consider the relatively disappointing earnings season so far. Some major companies that came up short this week on either results or guidance include Union Pacific (UNP), 3M (MMM), Verizon (VZ), and Texas Instruments (TXN).

Yesterday, investors again piled into shares of some of the market’s best-known companies including Apple (AAPL), Boeing (BA), Caterpillar (CAT), Honeywell (HON), Coca-Cola (KO), and JPMorgan Chase (JPM). Those stocks all have one thing in common: They’re part of the Dow Jones Industrial Average® ($DJI), and the $DJI was the one major index to post gains Tuesday.

The SPX lost ground. So did the technology-dominated Nasdaq Composite® ($COMP) when semiconductor stocks that led the rally Friday and Monday turned red Tuesday. That shouldn’t be too surprising to anyone, considering semiconductors collectively posted their best close since August on Monday, perhaps opening the sector up to a bit of profit taking ahead of INTC earnings.

Here’s how the major indexes performed Tuesday:

• The $DJI was the only major index with gains, adding 104 points, or 0.31%, to close at 33,733.
• The $COMP fell 0.27% to 11,334.
• The Russell 2000® (RUT) dropped 0.22% to 1,886.
• The SPX fell 2.86 points, or 0.07%, to 4,016.

CHART OF THE DAY:  MAKING A BREAK FOR IT. The bulls crossed a major battleline this week as the S&P 500 (SPX—candlesticks) broke above its downward channel’s resistance line. The bulls were able to hold the breakout on Tuesday, potentially a good sign for investors. Many technical analysts use the channel’s height to forecast potential price targets. This is done by measuring the channel’s height (754) and adding it to the breakout point (3,980). So, short-term technical analysts may be targeting the 4,734 (754 + 3,980) level for a potential run. However, others may argue the trend continues to point downward, so such a target may be unlikely until the index can move well above its November 2022 high. Data source:  S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Tech Next: IBM (IBM) reports after the close today, and Intel (INTC) steps up to the plate after tomorrow’s closing bell. Big Blue stood out last year in a tech sector that saw its most popular companies collectively lose nearly $5 trillion in market capitalization, according to Barron’s. IBM actually posted a slight gain in 2022 as the company worked on a transition toward the cloud and artificial intelligence software. Investors may also want to know  whether IBM plans acquisitions in the coming year.

Still, the biggest crush of info tech and communication services earnings comes next week when Meta (META), Amazon (AMZN), Apple (AAPL), and Alphabet (GOOGL) all report over just two days. Ad revenue is a big metric to watch—especially at GOOGL and META. It’s a big part of their revenue and industrywide, online ads have been sluggish (see more below).

‘Click dip’ hurting tech: Ad spending in the tech and media sectors slowed dramatically in 2022, media and tech research firm MoffettNathanson told The Atlantic recently. By the end of the holidays, there was “hardly any money being spent at all,” the research firm said. While META and GOOGL may come to mind first as potential victims of a soft advertising climate, even firms like AMZN and AAPL could be sensitive to an ad spending slowdown, said the publication, adding that this advertising dip is coming on stronger and faster than the overall economic slowdown. Perhaps that could explain why tech’s been so aggressive in laying off employees lately even while the rest of the labor market seems healthy.

Remember volatility? Yesterday marked the first anniversary of the VIX hitting its 2022 peak near 40. It remained elevated most of the year, trading well above 30 even into October. Since then, it’s been a lap cat, recently falling below its historic average of around 20. The thing to remember about the VIX is how fast it can go from sleeping to hissing as it did at the start of the 2020 pandemic and in 2022 when inflation spiked, Russia invaded Ukraine, and inflation fears grew. What could spike the VIX again? Fresh geopolitical concerns from Russia, China, and North Korea come to mind. A move toward $100 per barrel crude would also work, as would serious brinkmanship in the battle over the U.S. debt ceiling. If the VIX rallies again, investors might be drawn from their current focus on growth stocks back toward perceived safety in staples and utilities.

Notable calendar items

Jan. 26: December Durable Goods and Durable Orders, Q4 GDP (first estimate), December New Home Sales, and expected earnings from American Airlines (AAL), Mastercard (MA), Southwest Airlines (LUV), Dow Chemical (DOW), Alaska Air (ALK), and Blackstone (BX)

Jan. 27: December PCE Prices, Final January University of Michigan Consumer Sentiment, and expected earnings from American Express (AXP) and Chevron (CVX)

Jan. 30: Expected earnings from GE HealthCare (GEHC) and Philips (PHG)

Jan. 31: Start of FOMC meeting, January Chicago PMI, December Consumer Confidence, and expected earnings from ExxonMobil (XOM), General Motors (GM), Pfizer (PFE), McDonald’s (MCD), Caterpillar (CAT), and UPS (UPS)

Feb. 1: FOMC rate decision, December Construction Spending, January ISM Manufacturing, and expected earnings from Altria (MO), Meta (META), Peloton (PTON), and Waste Management (WM)

Feb. 2: December Factory Orders and expected earnings from Apple (AAPL), Amazon (AMZN), and Alphabet (GOOGL)

Feb. 3: January Nonfarm Payrolls and expected earnings from Sanofi (SNY) and Cigna (CI)

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

Image sourced from Shutterstock

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