Weekly Market Perspectives: Rocky start to earnings season pushes markets lower

Published: October 30, 2023

Markets were firmly focused on earnings last week as a whopping 40% (as measured by market cap) of the S&P 500 reported Q3 results. Other developments on Capitol Hill, the Middle East, and monetary policy took a back seat as investors concentrated on company fundamentals and the details shared in quarterly conference calls. Overall, earnings have been coming in ahead of expectations (79% positive) but no more so than historical averages. It is revenue figures that have investors more concerned – only 47% of companies have reported a positive surprise, the lowest figure since 2019. Additionally, forward guidance has been conservative to fully defensive pushing investors and analysts to revise expectations lower. The knock-on effect has been a falling market as investors re-price fundamental growth. The S&P 500 traded lower by -2.5% but the US Aggregate bond index increased by +0.7% as yields fell modestly across the long end of the curve.

The ‘Magnificent Seven’ companies have been the story of the year as the artificial intelligence narrative powered exceptional performance for many of them. The secular tailwinds behind AI, cloud adoption, and digital advertising remain strong, but this quarter seems to be marked by resetting expectations. Following reports from big tech companies Microsoft, Meta, Tesla, and Alphabet, more the $400 billion of market cap was wiped off the index as mediocre quarterly results and forward guidance weighs on expectations. The lone stand out was Amazon which traded higher after indicating a positive outlook for the holiday season. While these five companies represent 17.5% of the S&P 500, there remains 40% of companies still to report. More to come…

Tesla: Company missed on earnings, revenues, and margins as well as offering poor guidance amid a weak macroeconomic outlook.

Microsoft: Beat on earnings and revenue driven by strong cloud performance. The company announced positive outlook with an uptick in their AI and streaming services. Investors welcomed the strong company performance, but the stock traded lower amid poor sentiment in the tech industry.

Google/Alphabet: Company announced beats for both earnings and revenue but missed expectations in the cloud business weighed on the stock. Forward guidance remains decent, but investors reduced estimates given slower cloud growth.

Facebook/Meta: Beat on earnings and revenue but provided weak forward guidance amid an uncertain advertising environment. Investors welcomed the positive fundamental developments but pushed the stock lower on poor macroeconomic guidance.

Amazon: Reported revenue and profit that topped estimates, driven by rising retail sales and significant cost cutting although the company reported slightly weaker-than-expected cloud revenue. The company also posted an upbeat outlook for fourth quarter holiday shopping.

Apple reports November 2 and Nvidia reports November 21.

Indicative of the durable earnings, the US economy posted the strongest quarterly growth in nearly two years according to figures showed from the Bureau of Economic Analysis on Thursday. US GDP expanded +4.9% on an annualized basis quarter-over-quarter, coming in well above expectations of +4.5%, and year-over-year figures showed the economy expanded +2.9%. US growth was driven by strong consumption which expanded +4%, proving resilient in the face of rising prices and higher borrowing costs. The numbers were corroborated by the personal spending measures released on Friday that showed an increase of +0.7% month-over-month, ahead of expectations of +0.5%. The consumer showed no signs of slowing in the summer as spending on travel, leisure, housing, and motor vehicles outstripped income gains. While a significant driver of strong real consumption continues to be a robust labor market with strong wage gains, it will be interesting to watch if the consumer is able to spend through a holiday season with higher prices and increasing pressure on household balance sheets.

Increased consumption has put pressure on prices, but two core measures of inflation came in lower than expected on Thursday and Friday. The core PCE price index rose +2.4% year-over-year showing that inflationary pressures continue to dissipate while the core PCE deflator, exclusive of food and energy costs, came in at +3.7% – the slowest rise since Q2 2021. The lower inflation readings are a welcome development but remains higher than the Fed’s 2% target. Investors will get an update on monetary policy this week following FOMC meetings.

Source: Bloomberg, Bureau of Economic Analysis

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