A lack of conviction, coupled with a week’s worth of corporate financial results, mixed in with concerns of disappointing profits, was the recipe for the stock market’s seemingly lack on direction on Friday. While Friday’s uneventful seesawing price action might have been frustrating for some investors to watch, at least we’re no longer talking about “finding the bottom.” The market’s 7% rise so far in 2023 suggests there is some optimism even amid recessionary fears.
Stocks closed out Friday, seemingly flatlined if not on a downbeat note, booking modest losses for the week. This week’s trading activity, particularly in high-growth stocks like Tesla (TSLA) and Netflix (NFLX), which were beaten down due to weak earnings, suggested investor optimism might have exceeded what the companies have demonstrated they can do amid a recession.
The Dow Jones Industrial Average on Friday rose by 22.34 points, or 0.07%, to end Friday's session at 33,808.96. Despite an up day, among the Dow’s notable decliners were Apple (AAPL), Intel (INTC), Microsoft (MSFT). The S&P 500 added 3.73 points, or 0.09%, finishing at 4,133.52, while the tech-heavy Nasdaq Composite notched up by 12.9 points, or 0.11%, to close at 12,072.46. Even with that close, all three major averages finished the week in the red, with the Dow and the S&P 500 posting their worst weekly performances since March.
Despite the optimism for an economy that has shown immense resiliency and corporate earnings which haven’t been as bad as some had feared -- of the S&P 500 companies that have reported earnings thus far, close to 80% have surpassed Wall Street’s profit estimates -- there is pessimism surrounding what the Fed will do next. The central bank has already raised rates significantly over the past year, and may be looking at these same reasons for optimism and see no reason to slow the rate hike cycle.
According to the CME FedWatch tool, there is an 85% probability that the Fed will increase rates again at is May policy meeting, by 25 basis points. The question is, will they hold rates steady at the current level or pivot to a more dovish approach? The same tool suggests there is a 30% probability of another 25 basis point hike at the June meeting. With the major averages suffering back-to-back weekly losses, can big tech power another rally?
We will get the answer to that question with Amazon, Alphabet, Microsoft and Meta Platform slated to announce their results.
Alphabet (GOOG , GOOGL) - Reports after the close, Tuesday, Apr. 25
Wall Street expects Alphabet to earn $1.06 per share on revenue of $68.83 billion. This compares to the year-ago quarter when earnings came to $1.23 per share on revenue of $68.01 billion.
What to watch: The rapid adoption of OpenAI’s ChatGPT in partnership with Microsoft has a cohort of the stock market questioning whether Google’s decades-long dominance in online search might be coming to an end. Shares of the Google and YouTube parent have risen 19% year to date, besting the 7% rise in the S&P 500 index. Still, the stock has fallen close to 20% over the past year, driven by various macroeconomic concerns such as rising inflation and a slowdown in digital advertising. The slowdown in advertising so far in 2023 has not been as bad as expected. The stock has risen on the assumption that Google’s strong cloud growth will provide an offsetting factor for any weakness in the core business. Although it is not yet profitable, Google’s cloud revenue has doubled over the past two years. Meanwhile, as with other tech companies, Google is cutting costs to right-size its business, including reducing its headcount. The company has been trimming in research and development as well as in sales and marketing expenses. As a result, even amid weaker revenue, the company may realize sequential margin improvement to deliver higher earnings. The result could also be higher free cash flows on an annualized basis. While Google's advertising business may continue to experience some weakness, there will continue to be other drivers of overall performance. On Tuesday, investors will want to see the results of the company’s recent decisions.
Microsoft (MSFT) - Reports after the close, Tuesday, Apr. 25
Wall Street expects Microsoft to earn $2.23 per share on revenue of $51.02 billion. This compares to the year-ago quarter when earnings were $2.22 per share on $49.36 billion in revenue.
What to watch: Has Microsoft already been crowned the winner in the artificial intelligence race? With the company’s "multi-year, multi-billion dollar" investment in ChatGPT developer OpenAI, Microsoft has made no secret that AI will be a key source of its future growth. The market is seemingly onboard with Microsoft’s early leadership position. With a gain of 21% over the past six months, while climbing 20% year to date, Microsoft’s AI investments are being rewarded. And there are more gains ahead, according to Morgan Stanley analyst Keith Weiss. When discussing the leading software companies that are pushing into the cloud and AI markets, Weiss said, “Microsoft is best positioned to gain market share.” Weiss, who has an Overweight rating on the stock with $307 price target. The analyst recently cited results from a Morgan Stanley survey showing that Microsoft has a "higher degree of cloud adoption" among enterprise customers. Adding that AI is expected to grow to 9% of current IT spending in three years, up from 3% growth this year. Weiss said Microsoft was cited consistently as "the largest share gainer" of AI and machine learning spending during the next few years. The company's push into artificial intelligence and renewed confidence in its Bing search engine, coupled with its fast-growing Azure cloud platform makes Microsoft a stock to own in 2023 and beyond. On Tuesday, the company’s guidance will gauge how confident the management feels about its growth potential and the company’s ability to navigate through margin headwinds.
Meta Platforms (META) - Reports after the close, Wednesday, Apr. 26
Wall Street expects the Facebook parent to earn $2.03 per share on revenue of $27.62 billion. This compares to the year-ago quarter when earnings came to $2.72 per share on revenue of $27.91 billion.
What to watch: After suffering the biggest losses among its FAANG peers in terms of market cap percentage in 2022, Meta Platforms has come roaring back so far in 2023, posting a year to date gain of close to 80%, compared to 7% rise in the S&P 500 index. Meanwhile, Meta stock has gained more than 60% in the past six months, while the S&P 500 has gained just under 13%. Wall Street has rewarded the company for its combination of cost-cutting efforts and the fundamental improvement CEO Mark Zuckerberg has made to right-size the business amid a decline in the digital ad business at its core Facebook and Instagram products. There is also optimism not only in potentially easing monetary policy in the latter part of the year, but also that Meta can easily surpass its year-over-year revenue and profit comparisons. The global digital ad spending is expected to grow to roughly $422.8 billion this year, rising 7.2% year over year. While that’s a meaningful growth deceleration from slowdown the near 14% growth experienced from 2021 to 2022, it is growth nonetheless. With an estimated 3 billion monthly active users on its family of products, Meta can still surpass growth expectations, which are low, while generating strong free cash flow. The company on Wednesday must continue to show gradual improvements, while demonstrating its prominence among big tech for the quarter and full year.
Amazon (AMZN) - Reports after the close, Thursday, Apr. 27
Wall Street expects Amazon to earn 22 cents per share on revenue of $124.53 billion. This compares to the year-ago loss of 38 cents per share on revenue of $116.44 billion.
What to watch: With a gain of 23% year to date, besting the 7% rise in the S&P 500 index, Amazon stock has been one of the better performing names within the tech sector. As with other tech names, the company’s decelerated profit growth has been one the key reasons for the stock’s struggles over the past year. However, in response to an uncertain macro backdrop, management has implemented some aggressive cost-saving measures to boost both profitability and its margin profile. These measures include shutting down unprofitable businesses, reducing its global headcount and reprioritizing resources in an effort to right-size the business. The goal is to emerge leaner and stronger. On the bright side, there’s still Amazon Web Services, which has been the company’s main profit producer. Although growth in that business is slowing due to global macroeconomic uncertainty, it is approaching a $90 billion annualized revenue run rate. Meanwhile, analysts are still projecting 15% year-over-year growth for AWS in the first quarter. While AWS continues to have a strong pipeline for attracting new customers, investors will want to know when will cloud growth re-accelerate? From a valuation perspective, Amazon still looks like a bargain with its shares still down some 32% over the past year. For that to matter in the near term, on Thursday beyond a top- and bottom line beat, investors will want strong profit guidance to support the long-term return investment thesis.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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