Stocks plunged this morning on weak guidance from Meta Platforms and another reminder of possible inflation stickiness. Microsoft and Alphabet report later.
Meta earnings disappointed, sending shares tumbling 13%
Weekly Initial Jobless Claims fell toward long-term lows at 207,000, continuing claims at 1.781 million
(Thursday market open) Wall Street is back in sell-off mode this morning as Treasury yields soared following uncomfortably hot inflation data and disappointing earnings from Meta Platforms (META). Shares of that mega cap fell 13% ahead of the open.
The market was already lower on Meta before losing more ground after the government’s first estimate for Q1 gross domestic product (GDP) hit the tape. While GDP growth of 1.6% was below expectations, investors appeared to fixate on the inflation component of the report. The Q1 chain deflator—which measures the final cost of all goods and services produced domestically—rose 3.1%. That was above the 2.9% Briefing.com consensus and Q4’s 1.6%.
“Markets are looking for evidence that the disinflationary trend is resuming, but this report didn’t deliver that message,” said Collin Martin, director, fixed income strategy, at Schwab.
Today’s GDP price data comes a day ahead of March Personal Consumption Expenditure (PCE) prices, due tomorrow morning. Wall Street expects monthly PCE growth of 0.3%. So far, all of this year’s inflation data has been hotter than expected, pushing back rate cut hopes. The Federal Reserve isn’t expected to adjust rates at its meeting concluding next Wednesday, but tomorrow’s PCE report could affect policy makers’ thinking on rate cut timing.
This morning’s Meta Platforms-related weakness on Wall Street is an uncomfortable reminder of how much influence these huge stocks can have. Meta fell mostly due to lower-than-expected revenue guidance, but rising costs also played a role.
Futures based on the S&P 550® index (SPX) were down 0.95% shortly before the close of overnight trading and futures based on the Nasdaq-100® (NDX) fell 1.3%. Futures based on the Dow Jones Industrial Average® ($DJI) dropped 1%.
The GDP report’s chain deflator figure may end up having more impact on the market today than the soft overall reading. At this point, bad news is good, so to speak, as any economic slowdown may help the Fed find reasons to consider rate cuts. The inflation data, however, go against hopes for a cut anytime soon. Tomorrow’s PCE data now becomes even more significant with this unpleasant inflationary reminder today.
Most concerning in the GDP data was the core GDP price index coming in at an annualized rate of 3.7% in Q1. That suggests inflation is far from cooling off even subtracting volatile food and energy prices. Increased consumer spending on services was partially offset by lower spending on goods, the government said, but strong consumer spending can often keep prices elevated. Most of the GDP increase came courtesy of consumer spending, though that decelerated from Q4.
Another reminder of the hot economy came from this morning’s Weekly Initial Jobless Claims, which fell toward long-term lows at 207,000. That was below the previous week’s 212,000 and below expectations for 215,000, according to Briefing.com. Continuing claims of 1.781 million stayed on the lower end of the long-term trend, another reminder that the U.S. labor market remains healthy. At this point, with inflation so sticky, it might take a job market dive for the Fed to feel pressure to cut rates.
Price update: Friday’s March PCE data follow hotter-than-expected Consumer Price Index (CPI) and Producer Price Index (PPI) reports already released for the month.
There’s some hope that PCE could be milder, in part due to fluctuations in PPI and also because it’s less shelter focused than the CPI data. Stubborn shelter costs are one factor keeping inflation elevated.
Consensus approaching tomorrow’s data is 0.3% for both PCE and core PCE on a month-over-month basis, according to Trading Economics, the same as the 0.3% increases for each in February. Core strips out volatile energy and food prices.
On an annual basis, analysts expect PCE to climb 2.6% and core PCE to also rise 2.6%, compared with 2.8% and 2.5%, respectively, a month earlier.
Any signs of improvement will likely be welcomed, with a corresponding drop in Treasury yields possible. And vice versa. Equities tend to take their cues lately from fixed income, so watch yield action early tomorrow for clues.
“The month-over-month figure is expected to rise by 0.3% but a lower reading may cause the market to pull forward expectations for Fed rate cuts,” said Cooper Howard, director, fixed income trading at Schwab.
Meta shares plunged double digits immediately after the social media firm reported earnings yesterday, hurt by Q2 revenue guidance and the company’s decision to raise the low end of its fiscal 2024 expense guidance due to higher infrastructure and legal costs. Meta also raised its capital expenditure guidance for fiscal 2024 due to infrastructure investments it’s making to support AI.
Normally a double-digit plunge in Meta might spill into the rest of the mega caps, but the spending issues are isolated to Meta, not necessarily reflecting broader industry dynamics. That could help contain damage to the tech sector today, but time will tell. And the company’s lighter-than-expected Q2 revenue forecast could mean some negative spillover into the rest of the social media universe. Since most of Meta’s revenue comes from ad spending, this could be a shot across the bow for the industry that perhaps demand for internet ads is slowing.
A bit lost amid the stock’s descent were strong growth in ad impressions, along with a 27.3% rise in year-over-year revenue. However, the stock is up sharply over the last year and the good news might be baked in, to some extent. The rally keyed off partly on Meta’s successful cost-cutting efforts, so yesterday’s expense news might have been an unwelcome surprise.
Microsoft (MSFT) and Alphabet (GOOGL) are two and three behind Amazon (AMZN) in the hotly contested cloud market, and both serve up their latest earnings entrees after today’s close. Analysts expect Microsoft to report earnings per share (EPS) of $2.82 on revenue of $60.8 billion, according to consensus from Yahoo Finance.
Alphabet’s EPS is seen at $1.51 and revenue estimates average $78.59 billion, according to Yahoo Finance.
Microsoft has been gaining cloud share on Amazon lately with big growth in its Azure cloud platform, so keep an eye on that business when Microsoft reports. Azure and other cloud services revenue rose 30% in the previous quarter, above analysts’ average estimate of 27% and a sequential improvement from 29% the quarter before.
Microsoft also helped spark AI excitement in late 2022 with the launch of Open AI’s ChatGPT, which helped shares outpace the broader market for more than a year. However, Microsoft shares have leveled off in early 2024, and investors likely want to hear more today from company leaders about how Microsoft is infusing AI into its business and how that’s shaping up in terms of return on investment. That puts the spotlight on AI-related revenue from Azure and the company’s CoPilot AI tools.
Shares fell in January after Microsoft’s last earnings report, reflecting investor disappointment with relatively light revenue guidance. The company’s updated outlook today could be a difference maker in how the stock performs in the hours and days ahead.
Search me: A cute headline on MarketWatch this week sums things up nicely for Alphabet. According to MarketWatch, Alphabet “should show AI boosts, but Google still faces many clouds.” The clouds include regulatory risks and deepening layoffs, MarketWatch reports. However, Wall Street does see improved ad spending thanks to the summer Olympics and the U.S. election, so investors should check if that gets reflected in Alphabet’s guidance.
AI can help companies like Meta and Alphabet grow their ad businesses, in part through improved targeting. But AI also presents a challenge for Alphabet’s search business as competitors like Microsoft and Apple (AAPL) incorporate the technology. Apple might be considering a search platform of its own, MarketWatch reported.
Earnings scorecard: Of the approximately 138 S&P 500 companies that reported quarterly earnings so far, about 52% have exceeded revenue expectations and 80% have topped earnings expectations. The revenue beat rate has been relatively weak over the past three quarters relative to the past several years. That could suggest companies aren’t as easily able to grow revenue from raising prices.
Thursday’s earnings calendar also includes AstraZeneca (AZN), Bristol-Myers Squibb (BMY), Comcast (CMCSA), T-Mobile US (TMUS), Union Pacific (UNP), and Valero Energy (VLO).
Stocks on the move:
Wednesday in review:
U.S. stocks ended mixed Wednesday as stronger-than-expected economic numbers boosted Treasury yields to their highest levels in more than a week. Transportation shares were among the market’s weakest links Wednesday behind a drop of more than 10% in Old Dominion Freight Line (ODFL), which reported lighter-than-expected quarterly revenue. That followed disappointing earnings last week from J.B. Hunt Transport (JBHT). Soft volume in transports could be a canary in the coal mine for softness in consumer and business demand.
Early today, futures traders place 99% chances of rates remaining unchanged at the FOMC’s April 30–May 1 meeting. Odds of a 25-basis point cut at the June meeting are around 14%, rising to roughly 39% for the late-July meeting, based on the CME FedWatch Tool.
CHART OF THE DAY: VIX DOWN, DOLLAR UP. After spiking last week to five-month highs, the Cboe Volatility Index (VIX-candlesticks) has settled down somewhat, though it’s slightly elevated today. On the other hand, the dollar ($DXY-purple line) hasn’t descended much from recent long-term highs and could pose a headwind for stocks. Data sources: ICE, Cboe. Chart source: thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
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Off the QT? Investors build in no chance of a rate cut or hike next week and the meeting doesn’t include updated rate projections, but one thing to watch might be what, if anything, the FOMC says about its quantitative tightening (QT) program. Earlier this year, the FOMC hinted it might slow QT as rates fell. Now, with rates near last November’s peak, the question is whether that strategy gets delayed. Any sign of the Fed delaying changes to QT, which was designed to keep rates relatively high and soak up excess liquidity in the economy, would likely get a less-than-cheerful greeting on Wall Street. But investors might already be building in such news, considering recent hawkish Fed remarks on the economy.
Talking technicals: Benchmarks like the SPX index remain under technical pressure in the wake of last week’s steep downturn, said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. “Technically, we still have repair work to do across the major averages, all of which dropped below their respective 50-day simple moving averages over the past two weeks,” Peterson said. “Perhaps we just need to go through a sideways consolidation period to work off some of the first-quarter euphoria that built up around AI, strong economic data, and notions of an accommodative Fed.”
Perspective check: Reports like tomorrow’s PCE often draw heavy media coverage, and markets can move quickly on the data. Keep in mind that every data point is simply a snapshot, and not the ultimate arbiter of market direction. If you trade, consider waiting for the dust to settle or keeping sizes smaller immediately after the tide of data and earnings awaiting us.
April 26: March PCE Prices and March core PCE Prices, March Personal Income and Personal Spending, final University of Michigan April Consumer Sentiment, and expected earnings from AbbVie (ABBV), Chevron (CVX), Exxon Mobil (XOM), and Aon (AON).
April 29: Expected earnings from Paramount Global (PARA).
April 30: April Consumer Confidence, Q1 Employment Cost Index, and expected earnings from 3M (MMM), Coca-Cola (KO), Eli Lilly (LLY), McDonald’s (MCD), Amazon (AMZN), Starbucks (SBUX), and Super Micro Computer (SMCI).
May 1: FOMC meeting announcement and press conference, March construction spending, April ISM Manufacturing Index, and expected earnings from CVS Health (CVS), DuPont (DD), Estee Lauder (EL), Mastercard (MA), and Carvana (CVNA).
May 2: March Trade Balance, March Factory Orders, and expected earnings from Baxter (BAX), ConocoPhillips (COP), Apple (AAPL), Amgen (AMGN), and Coinbase (COIN).
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