For those of you who would prefer to listen:
Earnings drive stock prices. Profit growth is the fuel for Corporate America. That’s the long-term Market theme. However, the Fed has had the greatest impact on the Market in 2022. That will change at some point, and fundamentals will take over again. It changed a little already. Earnings took center stage this week, as investors study the facts of how some of the largest companies in the Stock Market are navigating this challenging environment. Earnings Season brings a lot to learn about the present and the future. We sure learned a lot. 165 companies, representing nearly half of the total value of the S&P 500 index submitted their report cards this week. It included all of the Big Tech names. The Top 5 companies account for 20% of the S&P Market Cap and 15% of earnings. This week mattered. It mattered a lot.
Earnings continue to weigh heavy on Mega Cap Tech but shines on Industrials and Energy. The Dow has taken pole position from the NAS in 2022 and the S&P is being pulled by both. With just 1 trading day left in October, the Dow is on track for its best month since 1976. That’s when Rocky made its debut in theaters and the Big Red Machine won the World Series. The Dow soared over 14% in just the last 2 weeks. Bear Markets bring the biggest rallies. It’s the volatility that shakes investors out. It’s by design. The Market has a way of sending stocks back to their rightful owners during Bear cycles. It’s those investors that can stomach the volatility and see beyond the now. The 2020s are all about extremes.
Here’s a rapid rundown for the week:
Amazon reported a big miss, while Apple had a double-beat and overall solid quarter. More on that below. Energy continues to lead the earnings parade. So far, Energy companies account for all of the earnings growth in Q3. Higher prices mean higher profitability for producers. Exxon reported a double-beat, with the highest profits in its century and a half history. The Texas-based Energy Titan also increased its dividend again, for the 40th consecutive year. Chevron beat expectations with record Liquid Natural Gas deliveries which are helping the crisis in Europe.
Apple is proving again that it’s in a class of its own. The Market made it clear the iPhone maker is the best of the bunch out of a disappointing week of Big Tech earnings. Apple reported a double-beat. The company generated record revenue over $90 Billion. That was better than anticipated. It also came with a serious headwind from the Strong Dollar, which makes sales overseas less affordable. Apple products are never cheap. The strength came from Macs sold at a record pace despite a slight miss on iPhone sales. The iPhone 14 Pro and Pro Max models remain supply-constrained, which indicates demand for the higher-cost phones. That’s good for Apple. The stock jumped on the move. That’s really good for the Market.
Amazon missed revenue estimates and offered a disappointing outlook for retail in general. Amazon Web Services, its most profitable business, also recorded its weakest growth on record. The guarded outlook doesn’t bode well for the Holiday shopping season. Management set low expectations. “As we’ve done at similar times in our history, we’re taking actions to tighten our belt, including pausing hiring in certain businesses and winding down products and services where we believe our resources are better spent elsewhere,” said CFO Brian Olsavsky. The stock fell sharply on the news, but closed well off its lows. Buyers seemed to step in below $100. It’s also probably accurate to say that sellers stopped selling below $100 too. That’s how bottoms are formed.
Alphabet (Google) reported a double-miss. Slowing sales growth continued as YouTube was hit by the sharp global shrinkage in online advertising. YouTube’s ad revenue fell for the first time since the company began reporting its standalone performance. Like every media outlet, YouTube is competing for eyeballs with TikTok, which seems to be the undisputed leader presently. Google’s traditional Search growth decelerated more than expected despite blustering activity in travel and retail. This is an important factor as search is generally recession resistant. The thing is, search reflects intent. People are looking for things. It suggests people are more cautious with activities ahead. Alphabet cited a slowdown in Financial Services, specifically in mortgages and cryptocurrencies. No surprise there. Another insight is search is generally small business advertisers, not the big brands. Small and medium-sized companies are cutting back on advertising which will influence the economic slowdown. Another clear issue: Google has been overspending. The company hired 31K people in 2022. That’s a 25% increase in employee base since last year. The Market didn’t like that at all. The company said they are slowing hiring. They’re likely to cut. The Market prefers that, which will enhance profitability. The stock caught a new bid into the weekend.
Microsoft reported a double-beat. Revenue increased to $50 Billion from $45 Billion a year ago. Microsoft’s problem in Q3; Azure slowed. The company’s cloud-computing business, led by Azure, is the Microsoft growth engine. It came in lower than expected. Azure grew by 35%, while the Street was expecting 36.5% growth. That is a continued slowdown from Azure’s 40% growth rate in the previous quarter, as well as the 50% growth shown in the same quarter last year. Slowing is expected. It’s just happening faster than the Street expected. The stock sold-off on the news initially. It also caught a bid into the weekend. Importantly, the sell-off did not take out the lows for Microsoft. That’s something.
The company formerly called Facebook continues to struggle mightily as it desperately tries to transform its business model to the Metaverse. The company has been spending massively to rebrand. It doesn’t seem to be working. Expenses weighed heavy on operating income, which was nearly cut in half. Whatever the opportunity may be in the Metaverse, the Market is all about reality right now. It is punishing companies that are recklessly spending on concepts. The Market wants to see returns on investment. The stock fell over 20% in a day and is down 75% on the year. Facebook was a Top 5 holding in the S&P 500 in 2021 with a market cap of over $1 Trillion. Today it’s $260 Billion, and not even in the Top 20. Facebook used to matter a lot to the Stock Market. Meta does not.
Coca-Cola reported a very solid quarter. Demand for the “Real Thing” and its other beverages is strong. The company continues to benefit from travel and people generally being out and about. Coke products are most popular at concerts, theme parks and sporting events. Covid hurt Coke. The re-opening sure has helped.
The Coca-Cola Company saw a bigger increase in revenues as well as volume sold around the globe. In other words, it wasn’t just higher prices that drove revenues. In fact, volumes surpassed their pre-pandemic highs. Coca-Cola’s results highlighted the thirst for its beverages, despite being squeezed by higher prices at the store. Volume of beverages sold increased 4% in the quarter. This means customers were willing to pay more for Coke products. Management sees it continuing as Coca-Cola raised its outlook for 14%+ revenue growth for the year. In comparison, when Pepsi reported its Q3 earnings earlier in the month, price increases were accompanied by weaker growth in volumes. Coke sold more. People are clearly out and about with a Coke and a smile.
The American Consumer is still spending. That’s critical for the US Economy. The Consumer accounts for roughly 70% of Gross Domestic Product. Here are some important data points uncovered from Earnings Season:
Bank of America said the bank hasn’t seen a slowdown in spending growth. BofA holds a lot of American checking accounts. They hold important data. So do the credit card companies. American Express saw no changes to consumer spending behavior either, expecting strength to continue into the Holiday Season. Visa said spending habits are changing a bit, but the level of spending is “holding in quite well.” Visa is not planning for a steep economic downturn or recession. UPS said it is looking to hire 100K workers for the Holidays, expecting package deliveries on par with previous years. Hilton experienced a surge in leisure travel, which they expect to extend into Q4.
The aggressive Fed and higher Treasury yields have sent mortgage rates soaring this year. The 30-year fixed-rate mortgage cleared 7%. It was 3% a year ago. That poured cold water on home prices. The increased borrowing cost is locking many out. Home affordability keeps getting tougher and tougher for new buyers. The percentage of Americans living paycheck-to-paycheck is at historic highs. Raymond James calculates that the monthly financing for a median home across the country now costs 42% of a median family’s gross income. That eclipsed the prior 40% record that marked the 2006 housing peak. I feel like I say it a lot: a 7% mortgage buys a lot less house.
Back to the Market: The relentless stock selling in September reversed in October. This 2-week rally has translated into a 20‐day high for the S&P 500 with a break through 3900. It’s an important first step. It sure is nice to see the green. The key for a sustainable rally will require a sequence of higher highs and higher lows. The 20‐day high is considered the first of many steps in that journey. The runway is there for this year-end rally. There’s just more work to be done.
So, earnings in general have come in less bad. With sentiment so sour after so much selling, the crowd seemed to be a little offsides. That set up this October relief rally, which was due. The bigger issue for the Market heading into November is whether the aggressive Fed-led tightening cycle is getting closer to the end. Both the Dollar and Treasury yields suggest it’s so. They’ve both come down after spiking in 2022, which have choked off asset prices. We learned a lot this week. We will learn a lot next week too. The Fed meeting re-takes center stage. One has to believe the Fed is very aware of the Market’s obsession with it. The Fed doesn’t want the Market to celebrate prematurely. It’s gone a long way to sniff out a pause. That said, it’s the Market that has forced the Fed’s hand to begin with. A great deal of damage has been done. A pause and a reassessment is logical and responsible. Ultimately, it’s the Market that calls the shots.
Have a nice weekend. We’ll be back, dark and early on Monday.