Stocks are taking a breather early Friday after Thursday's fast-paced rally. The tech sector had been having a very strong week until Amazon forecast slower cloud growth, and that appeared to bite into Wall Street's general positive sentiment. Today's PCE inflation data was as expected.
Amazon reverses initial gains after CFO warns of further cloud deceleration
Stocks on defensive following Amazon turnaround, but Exxon Mobil, Intel earnings cheer
Critical Inflation data comes in right down the middle, still trending generally lower
Alex Coffey, Senior Trading Strategist, TD Ameritrade
(Friday market open) Investors began the week with their umbrellas out, ready for a cloudburst as mega-cap tech companies reported. Yet earnings from big tech brought mostly sunny skies—at least until Amazon’s conference call yesterday afternoon.
Amazon’s (AMZN) results late Thursday initially looked like another win following mostly positive news from Microsoft (MSFT), Alphabet (GOOGL), and Meta (META). Shares of the retail giant rolled up premarket gains—and then executives told investors to prepare for slower cloud growth ahead.
The sudden change in fortunes for AMZN shares, which went from double-digit gains immediately after its report to losses after the conference call, spilled over into wider trading. Major indexes began Friday with a softer tone following Thursday’s dramatic gains.
One thing to note after yesterday’s rally is that the largest stocks continue to generate most of the positive returns. The S&P 500 index (SPX) is up about 7.5% year to date, but the equal-weight SPX, which weighs each stock in the index equally instead of designating weight based on market capitalization, is up less than 2% since the start of the year. Also remember that recent economic data suggest the economy is slowing, and more stocks set new lows than new highs in recent days.
From a technical perspective, the SPX is approaching 4,150—a level it has struggled to achieve and sustain since last fall. Valuations remain above historic norms.
Personal Consumption Expenditures (PCE) price data for March didn’t hold any surprises at first glance, rising 0.1% for the headline figure and 0.3% for core, which strips out food and energy. Those numbers were in line with expectations, and core was equal to February’s. Headline PCE fell from February but might have reflected lower gas prices.
PCE is the inflation measure watched most closely by the Federal Reserve, which meets next week.Today’s PCE data was pretty much as expected but is trending in a good direction for those hoping for inflation to moderate. In addition, personal income rose 0.3% in March, but spending was flat.
Shopping cart spills: Before its conference call late Thursday, AMZN shares did their best META imitation, jumping double digits on earnings a day after META did the same. Revenue and earnings per share for the retail and cloud giant easily surpassed analysts’ estimates, sending shares to their highest level since early February.
Then came the call, and a reminder to anyone trading on earnings that the story isn’t finished until company executives speak. “Customers continue to evaluate ways to optimize their cloud spending in response to these tough economic conditions in Q1, and we are seeing these optimizations continue into Q2 with April revenue growth rates about 500 basis points lower than what we saw in Q1.”
Those words from AMZN’s CFO Brian Olsavsky changed the tone not just for AMZN, but arguably for the entire market. Shares of AMZN surrendered all their initial gains and remained lower ahead of the opening bell. AMZN’s cloud growth had already been decelerating and was smaller than cloud growth at MSFT and GOOGL in the first quarter of 2023.
Beyond that, retail gave AMZN a nice boost, while the company’s Amazon Web Services (AWS) segment climbed about 16%. That was near analysts’ expectations but a deceleration from Q4. In a sense, there’s been a reversal of fortune. A few years ago, it was AWS beating estimates and retail lagging.
The retail strength shouldn’t necessarily come as a major surprise, considering many Q1 earnings so far signaled consumer resilience. A weaker dollar in Q1 versus Q4 may also have helped the company on a sequential basis after a tough Q4 in its retail business. AMZN’s Q2 revenue guidance was in the range of Wall Street’s expectations.
Chip check Shares of chipmaker Intel (INTC) posted premarket gains after the company delivered an above-expectations quarter and decent guidance. INTC isn’t out of the woods, with revenue down 36% year over year, however. The company’s CEO told Barron’s the macro environment remains tough, but there’s been some stability in personal computer demand and “green shoots” thanks to positive economic momentum in China.
Energy burst: Exxon Mobil (XOM) and Chevron (CVX) reported earnings that topped analysts’ estimates but remained below last year’s record levels. Both were burdened by tough comparisons to a year ago, when crude prices hit 15-year highs. XOM said in its conference call that it’s been adding supply.
Confidence measure: Just after the open, we’ll get a look at the final April University of Michigan Consumer Sentiment report. Expectations on Wall Street are for no change from the preliminary April reading of 63.5, which remains historically feeble. An important component is year-ahead inflation expectations, which ominously jumped to 4.7% earlier this month from the previous 3.6%. This may reflect consumers paying higher gasoline prices in early April, however.
BoJ Stands Pat: The Bank of Japan (BoJ) left rates unchanged at its meeting that ended Friday.
A packed earnings calendar and the Fed’s “quiet period” kept interest rate chatter muted this week. That changes in a big way when the calendar page turns and the FOMC gathers for its meeting that concludes Wednesday.
As of this morning, the probability of a 25-basis-point rate hike stands at 90.6% according to the CME FedWatch Tool. Despite recent uninspiring data—including Consumer Confidence, Gross Domestic Product (GDP), and Leading Economic Indicators—and continued concern about bank industry health, the Fed appears ready to tighten the screws again.
There’s not much mystery around next week’s meeting, so attention is turning to what’s next. If the recent soft data have had an impact, it’s on what the Fed might do this summer. The FedWatch Tool now works in about a 63% chance that the Fed will raise rates in May and then pause at the June meeting. There’s now only a 28% probability of another hike in June, according to the tool.
After that, the picture’s murkier. The futures market prices in a high likelihood of rates staying on pause through the summer and beginning to fall in September. There’s about an 80% probability built into the market that rates will end the year below the current target range of 4.75% to 5%. But the Fed pushes back, forecasting little if any chance of rates falling before 2024 at the earliest.
Debt debate: What’s next in Washington’s debt ceiling fight? What should investors keep in mind as they watch action over the next month in Congress? Michael Townsend, Schwab’s managing director of legislative and regulatory affairs, explains this pressing issue.
CHART OF THE DAY: RATE PRESSURE EASES ON TECH. One big reason info tech leads all S&P sectors with 18% growth year to date is the easing of Treasury yields. This six-month chart of the tech-dominated Nasdaq 100 (NDX—candlesticks) versus the 10-year Treasury note yield (TNX—purple line) makes things quite clear. Data sources: Nasdaq, Cboe. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Ideas to mull as you trade or invest
Consumers unfazed: Yesterday’s Q1 GDP report was relatively lackluster, with the notable exception of consumer spending. Earnings so far appear to back that up, though we’re only about halfway through the reporting season. At Coca-Cola (KO), United Airlines (UAL), McDonald’s (MCD), Mastercard (MA), and Visa (V), executives this week sounded enthused about demand. Some might say companies like MCD and KO sell “staple” products that tend to do well even when the economy slows. But that isn’t true of air travel, and V says demand for expensive trips to international destinations has soared. In addition, MCD reports that despite higher menu prices, more customers came through the door. GDP looks backward, of course, and recent data suggest the economy slowed in March after a hot start to the year. Still, consumer-oriented business leaders don’t seem to fear a big drop in demand, and low unemployment could also keep consumers reaching for their wallets.
Other side of the coin: GDP showed softer business spending, which investors seem to be building into shares of major industrial companies. For instance, check Caterpillar’s (CAT) stock performance yesterday. The heavy machinery company is highly visible around the country these days because of the many building projects underway, some funded by last year’s infrastructure legislation. CAT’s Q1 earnings and revenue looked solid, easily beating Wall Street’s estimates, but the stock got no traction. Some analysts say this reflects disappointing margin and guidance, but other major industrial stocks lately like Honeywell (HON) and 3M (MMM) also haven’t seen much investor love (though to be fair, HON got a nice lift after earnings yesterday). With leading indicators painting a weaker economic picture, investors have started reacting poorly to sluggish economic data and perhaps are penciling in slower growth down the line. This often feeds directly into future industrial demand.
Wildcard ahead of Fed: Tuesday’s March Job Openings and Labor Turnover Survey (JOLTS) bows right before the Fed’s decision. JOLTS slipped to 9.9 million in February, a sign that the labor market might be coming into better balance between those searching for jobs and the number of openings. Analysts expect another decline to 9.7 million in March, according to Trading Economics. Ever since the pandemic eased, openings far outpaced job seekers, forcing businesses to compete for new employees and retain current ones by raising wages. While every employee deserves fair pay, rising wages can contribute to inflation. The Fed’s been fighting that with higher interest rates. A smaller March JOLTS figure might give the FOMC more evidence that its strategy is working. A drop in “quits” would also be a step in the right direction from the Fed’s point of view, signaling that more people stayed in their jobs because they lack opportunities elsewhere. Remember, rising interest rates often take about a year to affect the economy. The Fed began raising rates in March 2022—exactly a year before Tuesday’s JOLTS data were collected.
May 1: March Construction Spending, April ISM Manufacturing Index, and expected earnings from CNA Financial (CNA).
May 2: Start of two-day FOMC meeting, March Factory Orders, March JOLTS Job Openings, and expected earnings from Cummins (CMI), DuPont (DD), Illinois Tool Works (ITW), Marathon Petroleum (MPC), Marriott (MAR), and Pfizer (PFE).
May 3: FOMC rate decision, April ISM Non-Manufacturing Index, and expected earnings from Bunge (BG), Estee Lauder (EL), Exelon (EXC), Kraft-Heinz (KHC), and Yum Brands (YUM).
May 4: Q1 Preliminary Productivity and expected earnings from Apple (AAPL), Anheuser-Busch (BUD), and PG&E (PCG).
May 5: April Nonfarm Payrolls, and expected earnings from Cigna (CI), Johnson Controls (JCI), Warner Bros. Discovery (WBD).
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