(Wednesday market open) Cloud computing dominates the proceedings this morning as Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOGL) drift in different directions following their earnings reports. A disappointing cloud performance from Alphabet clashed with sunnier tidings from Microsoft.
Those were the biggest fish reporting yesterday, but it’s not a small pond. A host of mammoth companies made a splash Tuesday with better-than-expected results, including Verizon VZ, 3M MMM, and General Motors GM. Today, Meta Platforms (NASDAQ: META) rolls out results after the close, and Amazon (NASDAQ: AMZN) follows tomorrow.
Generally, earnings so far this week are outpacing results from late last week. That, along with the recent pullback in 10-year Treasury note yields and crude oil, appeared to lift sentiment after last week’s losses.
Significantly, the S&P 500® Index (SPX) closed above its 200-day simple moving average (SMA) near 4,237 on Tuesday after spending a couple of days in the doghouse below it. One day won’t turn things around technically, but a series of closes above the 200-day SMA might improve bullish sentiment, provided geopolitics and yields don’t flare up.
There’s a mixed tone this morning as investors digest Alphabet and Microsoft results and await Meta and Amazon. Tomorrow the government will release its first estimate of Q3 Gross Domestic Product (GDP). The European Central Bank (ECB) also will meet tomorrow, and analysts expect a pause in its rate policy for the first time in 10 meetings. The Federal Reserve meeting next week also is expected to bring a pause, according to futures trading, but there’s about a one-third possibility built into the market of a quarter-point Fed hike in December.
Morning rush
- The 10-year Treasury note yield (TNX) climbed 2 basis points to 4.86%.
- The U.S. Dollar Index ($DXY) jumped to 106.43.
- Cboe Volatility Index® (VIX) futures steadied at 19.07.
- WTI Crude Oil (/CL) was flat at $83.69 per barrel.
Stocks in spotlight
Yin and Yang: They’re both mega-caps and in the cloud business, but similarities between Microsoft and Alphabet arguably ended there early Wednesday. Each went the opposite direction, and debate began over what their respective cloud market results might mean.
Microsoft’s Azure cloud platform enjoyed 29% growth, accelerating from 26% a quarter earlier and surpassing Wall Street’s 26% expectations. Meanwhile, Alphabet, which is third in cloud market share behind Amazon (AMZN) and Microsoft, saw cloud revenue grow just 22% and miss analysts’ estimates.
Both companies beat analysts’ overall earnings and revenue expectations, but Microsoft shares immediately jumped 5% in premarket trading while Alphabet shares fell 5%. Microsoft, in its earnings call, projected better-than-expected revenue guidance for the current quarter. It sees quarterly Azure revenue growth of up to 27%, with an increasing artificial intelligence (AI) contribution. Microsoft received several price-target increases from analysts following its results.
The cloud growth of these companies raises several questions. One is whether Microsoft gained share at the expense of Alphabet. Another is whether overall cloud growth is accelerating and Alphabet simply didn’t enjoy the new business. Amazon’s cloud results on Thursday could help clear things up to some degree.
Though Alphabet suffered from the cloud comparison, other metrics, including search, YouTube ad revenue and overall ad revenue, beat expectations—which might bode well for Meta Platforms META as it prepares to report this afternoon.
Shares of Meta—the parent company of Instagram and Facebook—have shined so far in 2023 based partly on cost-cutting efforts. AI is another focus.
There’s earnings action this morning as well. Boeing BA shares climbed 2.5% in premarket trading despite a wider-than-expected quarterly loss. Boeing faces a quality problem with its 737 Max that it now says will affect production. The stock is up despite what the company called “near-term challenges,” perhaps in part because Boeing reaffirmed previous guidance regardless of any issues.
The blue whales of Wall Street dominate reporting this week, but investors might take note that small-caps continue to struggle. The Russell 2000 Index (RUT) is testing 52-week lows below 1,700. Small-caps are often seen as a barometer of domestic economic health because they tend to conduct most of their business in the United States. They also can reflect banking industry dynamics because the Russell 2000 has a heavy exposure to the financial sector.
What to watch
U.S. September New Home Sales are due out soon after the open. The data pace picks up Thursday with a first look at Q3 Gross Domestic Product (GDP) and Friday with Personal Consumption Expenditures (PCE) prices.
New Home Sales grew 6% annually in August but dropped nearly 9% month-over-month amid higher mortgage rates. Analysts expect a slight headline rise in September to a seasonally adjusted annual rate of 683,000, says Briefing.com. For home builder stocks, price is likely the metric to watch. It’s been falling, a threat to home builder margins.
In its earnings release yesterday, homebuilder PulteGroup PHM said “The fundamental desire for homeownership is strong while the supply of houses remains constrained.”
Tomorrow morning features GDP and Initial Weekly Jobless Claims, with claims likely to have more immediate impact. Consensus for GDP is 4%, according to Briefing.com. The Atlanta Fed’s model projects 5.4%. Anything below 4% might cause reassessment, but for now analysts mostly expect robust results.
Initial jobless claims of 198,000 last week were the lowest since January but may have been artificially soft due to Columbus Day. That means some claims might have gotten pushed back, leading to an artificially high number tomorrow. Analysts expect 208,000, Trading Economics says.
Eye on the Fed
Early today, futures trading pegged chances at 97% that the Federal Open Market Committee (FOMC) will hold its benchmark funds rate at the current 5.25% to 5.50% target range following its October 31–November 1 meeting, according to the CME FedWatch Tool. The market isn’t quite as confident on the expected results following the FOMC’s December 12 meeting, with chances of a pause currently 69%.
Alternative universe: Alternative energy stocks have lost all their outperformance relative to traditional energy shares despite hopes for strength from the Biden administration’s emphasis on climate initiatives. But policy isn’t driving the weakness. “Investments in alternative energy have become unattractive due to higher interest rates, not changes in government policies or the adoption or pricing of green technologies,” says Jeffrey Kleintop, chief global investment strategist at Schwab. Get more of Jeffrey’s take in his most recent analysis.
Thinking cap
Ideas to mull as you trade or invest
Earnings inflation? By now most of us have heard the term “grade inflation,” a widely debated theory that claims college students more easily achieve good grades now than in the past. On Wall Street, there’s a similar debate around earnings estimates, and it casts doubt on the scoreboard-watching that dominates much of today’s media coverage. There’s evidence it’s gotten easier for companies to beat analysts’ earnings estimates over time. So far this quarter, 78% of S&P 500 companies have beaten analysts’ forecasts, up from the five-year average of 74%. The average since 1994, however, is much lower at 67%, implying that decades ago, analysts had a higher bar or companies guided less conservatively, or perhaps a combination.
Smaller pool: One factor contributing to the recent high “beat rate” is the pandemic, which led to a lower percentage of companies providing their own earnings guidance. Apple (AAPL) is a well-known example. “Companies are still readjusting to a post-COVID world,” says Kevin Gordon, senior investment strategist at Schwab. “It shouldn’t be lost on investors that we had a record number of companies that opted out of providing any guidance as the pandemic unfolded—and it took a long time to get back to ‘normal.’” When analysts have less information from companies, it’s harder for them to forecast adequately, which in turn makes “beats” and “misses” less reliable indicators for investors. Analysts might be more conservative, perhaps reflecting caution in the current recession-wary economy. This can set a low bar. Rather than looking at beat and miss rates, it might be more instructive to dig deeper into earnings reports and track margin and sales volume. If a company doesn’t provide guidance, listen to the earnings call for a sense of tone. That can mean a lot, though it’s unscientific. Tesla’s shares dropped sharply earlier this month when investors sensed a “cautious” tone on its call.
Direction sign: Amid growing ideas (but no guarantees) that the Fed may be finished raising rates this cycle, focus turns to the benchmark 10-year Treasury yield and where it might top out. It’s spent much of the last three months gaining on shorter-term yields on the market’s assumption that the Fed could keep rates higher for longer, and this has narrowed the closely watched 2/10 spread (the premium of 2-year Treasury note yields to 10-year note yields) to less than 25 basis points from more than 100 earlier this year. On Tuesday, things looked different, with the 2-year yield gaining on the 10-year. That’s trend worth watching, because it could imply an inflection point for the 10-year yield after it briefly reached 16-year highs of 5% this month. “Longer-term yields may have some more upside from here but we would not be surprised if they are near their peak,” says Cooper Howard, a director of fixed income strategy at the Schwab Center for Financial Research. If more investors begin to agree, that could become a self-enforcing mechanism where they gravitate more toward longer-term Treasuries to get these high yields while they can, which in turn would help push yields lower. The wild card remains fiscal and monetary policy. Both continue to push Treasury supplies higher, potentially preventing yields from dropping much even if demand improves.
Calendar
Oct. 26: Initial Weekly Jobless Claims, September Durable Orders, Q3 Gross Domestic Product, and expected earnings from Bunge (BG), Comcast (CMCSA), Honeywell (HON), Mastercard (MA), Merck (MRK), Southwest (LUV), Amazon (AMZN), and Ford (F).
Oct. 27: September Personal Income and Personal Spending, September Personal Consumption Expenditures (PCE) prices, Final October University of Michigan Consumer Sentiment, and expected earnings from AbbVie (ABBV), Exxon Mobil (XOM), and Chevron (CVX).
Oct. 30: Expected earnings from McDonald’s (MCD).
Oct. 31: S&P Case-Shiller home price index and October Consumer Confidence. Expected earnings from Cadence Design (CDNS) and Nucor (NUE).
Nov. 1: October ISM Manufacturing, September Job Openings and Labor Turnover Survey (JOLTS), September Construction Spending, Fed rate decision, and expected earnings from DuPont (DD), Humana (HUM), Kraft Heinz (KHC), American International (AIG), McKesson (MCK), Paypal (PYPL), Qualcomm (QCOM), and Roku (ROKU).
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