On the Cusp: Earnings Loom from Microsoft and Alphabet as Fed Gathers and Yields Slide

The market is on tenterhooks this morning as mega caps Microsoft and Alphabet prepare to report after the close even as the Fed begins its two-day meeting. Earnings results this morning look mixed, but Treasury yields fell.

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Key Takeaways

  • This morning’s batch of earnings looks mixed, with UPS disappointing but GM strong

  • Microsoft, Alphabet, and Advanced Micro Devices line up to report after the close

  • Treasury yields fell after the Treasury Department outlined quarterly funding needs

(Tuesday market open) A blockbuster week gathers steam today as the Federal Reserve starts a two-day meeting and Microsoft (MSFT) and Alphabet (GOOGL) report after the close. Major U.S. indexes sagged early Tuesday as investors monitored the latest batch of earnings.

Other crucial mega-cap earnings later this week include Apple (AAPL), Amazon (AMZN), and Meta Platforms (META). The five mega-caps reporting over the next few days represent more than $10 trillion in value, nearly a quarter of the S&P 500® index (SPX). Their earnings and guidance, along with the Fed’s statement and press conference tomorrow afternoon, could set direction following a string of record highs.

The stakes are high for mega-cap results after shares of many soared to all-time highs this month.

“A lot of the strength we’ve seen in the market is contingent on expectations of strong earnings from mega caps,” said Joe Mazzola, director, trader education, at Schwab. “Over the past three months, there’s been a steady decline in earnings estimates for Q4, perhaps suggesting a weakening outlook but also providing a lowered bar to assist with earnings per share beat rates. This created a bifurcation of market performers in January, with IT and communication services as sector leaders, and also sets the market up for some added sensitivity to this week’s mega-cap earnings.”

Mega caps dominate but don’t hold all the earnings cards. United Parcel Service (UPS) earnings this morning disappointed and might have a broader impact on the overall market, which is sensitive to delivery metrics. Competitor FedEx (FDX) shares dove last month after a FDX revenue outlook that disappointed investors.

Earnings from Pfizer (PFE) and General Motors (GM) both came in stronger than expected this morning while Starbucks (SBUX) could provide a jolt this afternoon. Advanced Micro Devices (AMD), a major semiconductor company that competes in AI, is also on deck after the close.

The broader U.S. market posted a record high close for the sixth time in seven sessions Monday, with the SPX finishing above 4,900 for the first time. While info tech and communication services were two of the top three sectors, consumer discretionary led the scoreboard and health care and real estate also performed well.

Excitement over recent robust economic numbers and hopes for a Fed “pivot” to lower rates kept things humming. Inflation growth continues to slow, but the Fed isn’t expected to make any interest rate moves tomorrow (see more below).

Futures based on the SPX dropped 0.2% shortly before the close of overnight trading. Futures based on the Dow Jones Industrial Average® ($DJI) fell 0.2% and Nasdaq-100® (NDX) slid 0.2%.

Morning rush

  • The 10-year U.S. Treasury Yield (TNX) dropped two basis points to 4.07%, a two-week low.
  • The U.S. Dollar Index ($DXY) is steady at 103.48. It’s been in the 103 handle since January 16.
  • The Cboe Volatility Index® (VIX) inched up to 13.7.
  • WTI Crude Oil (/CL) fell 1% to $75.92 per barrel but remains up firmly from early-January lows.

Treasury yields slipped early Tuesday after the U.S. Treasury Department said Monday it expects to borrow $760 billion this quarter. That’s $55 billion less than its October estimate, and points to falling supplies. This helped lift Treasury values, which move the opposite direction of yields. On Wednesday, the Treasury Department will provide detail around the size of the bonds it plans to issue. As Barron’s notes, this could prove even more relevant to the market, as a larger supply of longer-term bonds would likely push yields higher.

Stocks in spotlight

Mega-cap results could help investors better understand the near-term picture for key elements including everything from AI to smart-phone demand. Semiconductors, the cloud, and internet advertising are key metrics this afternoon.

Advanced Micro Devices earnings come after several firms in the sector including Intel (INTC) and Texas Instruments (TXN) issued disappointing outlooks last week. Nvidia (NVDA) waits in the wings for later in February, and, along with AMD, could provide more perspective into demand for AI chips.

The last time it reported, Microsoft enjoyed solid growth of 29% in its Azure cloud platform, accelerating from 26% a quarter earlier and surpassing Wall Street’s expectations. In its last earnings call, MSFT projected Azure revenue growth of up to 27% in the most recent quarter, with an increasing AI contribution. MSFT shares also got a boost last year as the company integrated AI software into the Bing search engine and invested $13 billion in OpenAI.

Analysts expect MSFT to report earnings per share (EPS) of $2.78 for its December quarter, on revenue of $61.1 billion, according to analysts surveyed by Yahoo Finance.

Cloud is also an important business for Alphabet, though it’s third in market share to Amazon and Microsoft. Alphabet’s cloud revenue grew 22% and missed analysts’ estimates in its last earnings report. Search metrics and internet advertising revenue are other major metrics to watch when Alphabet reports. The company’s shares, like those of Microsoft, recently hit record highs.

Analysts expect GOOGL to report quarterly EPS of $1.59 and revenue of $85.33 billion.

Stocks on the move early Tuesday include:

  • General Motors shares accelerated 7% in premarket trading after the company beat analysts’ average estimates on both EPS and revenue. Its fiscal 2024 guidance also came in above Wall Street’s consensus views. GM already reported a gain of 14% in 2023 U.S vehicle deliveries to 2.6 million, but Q4 sales in China fell sharply. GM said the situation there is “challenging.”
  • Pfizer, which saw shares drag most of 2023 amid falling COVID-19 vaccine demand and disappointing clinical trial data for its obesity pill, delivered a profit in its latest quarter when Wall Street had expected a loss. However, revenue missed analysts’ estimates. Shares inched higher ahead of the open. Pfizer reaffirmed previous 2024 guidance.
  • UPS shares plunged 7% ahead of the open after the delivery company missed Wall Street’s Q4 revenue estimate and guided for fiscal 2024 revenues below analysts’ consensus. Weakness showed up in both U.S. and international segment revenue. In its earnings release, the company called 2023 “a unique and difficult year.” Delivery volume declines drove the Q4 revenue losses. The conference call this morning might provide more color into why UPS is struggling and its read on consumer and business demand.

What to watch

Fed ahead: The market builds in virtually no chance of a rate move and about 50-50 odds of a rate cut in March. The meeting and statement might play second fiddle to Fed Chairman Jerome Powell’s post-meeting press conference tomorrow afternoon, in which analysts expect him to take a cautious tone. The last time Powell took the podium, in mid-December, his upbeat tone helped propel both stocks and Treasuries to a vigorous rally.

Several Fed speakers since then sounded more hawkish, turning down the sizzle in Treasuries that briefly took the 10-year Treasury note yield to below 3.8%.

“We’ll be focused on tweaks to the statement or comments from Powell at his press conference,” said Collin Martin, a director of fixed income trading at the Schwab Center for Financial Research. “We don’t expect the Fed to lay out a timeline for rate cuts, but the statement may highlight that the committee doesn’t expect any more tightening going forward. We believe a cut in March would be premature and believe a cut in May is more likely. The meeting might provide some details on the timing of when the Fed might begin to taper its quantitative tightening program.”

News from abroad: Several European flash Q4 Gross Domestic Product (GDP) readings beat or matched analysts’ expectations, Briefing.com reported. Meanwhile, in another sign of China’s continued struggles, its 10-year yield fell below the pandemic low to 2.48%. China delivered a batch of stimulus last week, but its stock market fell again today.

Late Tuesday U.S. time brings China’s official NBS manufacturing and non-manufacturing PMI readings. Analysts expect manufacturing PMI of 49.2, up slightly from 49 the prior month but still in contraction territory below 50.

Data calendar: Everything builds up to the January Nonfarm Payrolls report Friday morning. Also keep an eye on Consumer Confidence and Job Openings and Labor Turnover Survey (JOLTS). Both bow immediately after the open.

Analysts expect today’s January Consumer Confidence reading from the Conference Board to hit 116, according to Trading Economics, up from December’s 110.7. The report’s one-year inflation expectations figure could be front and center after remaining stubbornly high at 5.6% in December.

The consensus for December job openings is 8.75 million, Trading Economics said. That’s down slightly from November’s 8.79 million, the lowest since March 2021. Quits are seen steady at 3.45 million. Generally, market bulls want to see job openings and quits decline, suggesting a slowing jobs market that’s less likely to trigger inflation.

Eye on the Fed

Early today, futures trading pegged chances at 97.9% for the Federal Open Market Committee (FOMC) holding rates steady following this week’s meeting, according to the CME FedWatch Tool. The market prices in a 46.6% chance the funds rate will be a quarter point lower than now after the Fed’s March meeting.

What does the Fed do? To learn more about how the Fed sets monetary policy and the ways its policy affects the market and economy, check out this short Schwab video. In it, you’ll also learn some ways the Fed’s job has changed since the Great Recession. 

CHART OF THE DAY: PRICE OF PROTECTION: The insurance sector (SPSIINS-candlesticks) appeared to strengthen against the S&P 500 index (SPX-purple line) near the turn of the new year, but the recent rally in the benchmark index has kept pace with the insurance industry. However, the insurance industry sometimes attracts investors worried about possible recession. Data source: S&P Dow Jones Indices.  Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

The cost of wages: While it might get a little lost in the host of data and earnings this week, one item the Fed is likely to pay attention to comes tomorrow morning in the form of the Q4 Employment Cost Index. This gets back to the discussion above on how wages might play into inflation growth. In Q3, the report provided soothing signs (for the Fed) that compensation costs for civilian workers had eased over the previous year. They rose 4.3% for the 12-month period ending in September 2023 versus 5.2% for the 12-month period ending in September 2022, according to the Bureau of Labor Statistics (BLS). Since that report, the Fed’s favored inflation reading, Personal Consumption Expenditures (PCE) prices, have continued to show slower growth, and so have producer prices. Tomorrow’s read on employment costs, along with Friday’s wage growth in the Nonfarm Payrolls report, both play a big role in determining whether corporations face less margin pressure from rising wages. Analysts expect a 1% quarterly rise in the Employment Cost Index for Q4, down slightly from 1.1% for Q3, according to Briefing.com. The report comes out before tomorrow’s open.

Talking technicals: Monday’s rally took the SPX above 4,900 but investors probably shouldn’t make too much of it. “Five thousand is probably more significant, at least psychologically,” said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. “It seems the SPX is still in melt-up mode, positioning before key earnings reports. The big round numbers have needed multiple attempts to eclipse, like Dow 10,000, so SPX 5,000 may be similar, if and when we get there.”

Breadth check: About 75% of S&P 500 stocks trade above their 50-day moving averages, down from peaks above 90% earlier this month but well above the long-term average percentage. This suggests the rally is touching more sectors and a broader array of stocks, even if it remains tech dominated. Still, close to 60% of S&P 500 stocks entered the week trading below their levels from January 2022 when the market last peaked. And while the small-cap Russell 2000® (RUT) closed above 2,000 on Monday for the first time since January 2, it remains 18% under its all-time high posted in late 2021. The tide still isn’t lifting all boats.

Calendar

Jan. 31: FOMC rate decision and expected earnings from Boeing (BA), Mastercard (MA), GlaxoSmithKline (GSK), and Boston Scientific (BSX).

Feb. 1: December Construction Spending, January ISM Manufacturing Index, and expected earnings from Amazon (AMZN), Apple (AAPL), Altria (MO), Honeywell (HON), Meta (META), Peloton (PTON), Clorox (CLX), and U.S. Steel (X).

Feb. 2: January Nonfarm Payrolls, University of Michigan Final January Consumer Sentiment, and expected earnings from AbbVie (ABBV), Aon (AON), Chevron (CVX), and Exxon Mobil (XOM).

Feb. 5: Expected earnings from Tyson Foods (TSN), Caterpillar (CAT), and McDonald’s (MCD).

Feb. 6: Expected earnings from DuPont (DD), Eli Lilly (LLY), Spotify (SPOT), and Ford (F).

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Charles Schwab & Co., Inc. (“Schwab”) and TD Ameritrade, Inc., members SIPC are separate but affiliated subsidiaries of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.

Print

Key Takeaways

  • This morning’s batch of earnings looks mixed, with UPS disappointing but GM strong

  • Microsoft, Alphabet, and Advanced Micro Devices line up to report after the close

  • Treasury yields fell after the Treasury Department outlined quarterly funding needs

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