Tech Earnings Weigh on Futures, Fed on Deck
January 31, 2024
Equity futures are being influenced by the investor reaction to quarterly results and guidance last night from Alphabet (GOOGL), AMD (AMD), and Microsoft (MSFT) which has those heavily weighted shares trading down in pre-market. Moves in those share prices as well as those for other Big Tech stocks since late October put a high market expectations bar in place for those companies to clear.
December quarter results from Microsoft (MSFT) topped consensus revenue and EPS forecasts led by faster-than-expected growth for the company’s Azure and other cloud services. Microsoft’s guidance calls for its March quarter revenue to be in the $60-$61 billion range compared to the $60.97 billion consensus and the $62 billion delivered in the December quarter. Underlying that revenue guidance, continued growth in cloud is expected to be offset by a 10%-13% sequential decline in the company’s More Personal Computing segment.
Alphabet (GOOGL) reported earnings of $1.64 per share, beating estimates by $0.05 while revenues rose 13.5% YoY to $86.31 billion versus the $85.28 billion consensus. Cloud was the standout in terms of growth as Google Cloud saw a 26% increase YoY to $9.2 billion, putting the segment on par with YouTube Ads which saw 16.5% growth to hit that same number. On its earnings call, the company noted the step-up in capital spending during the quarter reflected its “outlook for the extraordinary applications of AI to deliver for users, advertisers, developers, cloud enterprise customers and governments globally and the long-term growth opportunities that offers. In 2024, we expect investment in CapEx will be notably larger than in 2023.”
Shares of AMD (AMD) are trading off in pre-market trading after the company’s largely in-line December quarter earnings report contained downside revenue guidance for the current quarter. For the current quarter, AMD sees revenue of ~$5.4 billion, plus or minus $300 million, compared to the consensus forecast of $5.75 billion. Inside that outlook, management sees a sequential decline in revenue for its client, embedded, and gaming segments with Data Center revenue expected to be flat sequentially.
As the market contemplates those reports and their implications, we have another barrage of quarterly results this morning and ADP’s January Employment Report at 8:15 AM ET. ADP’s findings are expected to show 145,000 jobs added during January, a slower pace than December’s 164,000 but a far faster one compared to the 98,700 average number of jobs added during September-November.
Following a wave of earnings conference calls throughout the morning, we could see investors become more cautious ahead of the Fed announcing its latest monetary policy decision at 2 PM ET. The market will be looking for the Fed’s policy statement and Fed Chair Powell’s presser comments to support its view the central bank will begin cutting rates in the next few months.
Developments in the Red Sea, the rebound in oil prices, the December core CPI report, and easing in credit conditions are some reasons the Fed could disappoint stock market doves. The likely message to be delivered by the Fed acknowledges the continued progress on inflation but notes that risks remain especially given the above trend growth in the economy. Should the Fed telegraph the start of rate cuts isn’t likely until late 3Q 2024 or early 3Q 2024, the market will need to adjust its rate cut expectations. If history holds, such a reset would bring a bout of volatility back into the market as the rest of Big Tech reports its earnings this week.
For more, be sure to read our Daily Markets column published each day by Nasdaq.
Model Musings
Aging of the Population
“As many as 77% of people age 50 and older want to stay in their own home as they age, but only 49% think that they will be able to do so, according to AARP. The homes people raise their families in may be too large and expensive for their needs in retirement and may also lack the modifications people might need as they get older. Renovations to make a home age-friendly can help, but there’s a limit to what can be done.” Read more here
Cloud Computing and Artificial Intelligence
“The company’s Azure cloud business grew 30%, beating analysts’ estimates of 27%. Behind that demand has been the continuing interest in cloud AI services that Microsoft has been leaning into as part of its partnership with Open AI, the startup behind ChatGPT. Microsoft said six percentage points of Azure’s growth came from AI demand. That doubled the amount AI contributed to Azure in the previous quarter.” Read more here
Consumer Inflation Fighters
“While price hikes have helped the Toblerone parent improve its profit margin through fiscal 2023, it is now starting to see softer demand as cash-strapped consumers cut back spending. The company reported organic net revenue growth of 9.8%, but volumes declined 0.4% in the quarter, joining other consumer staples firms such as McCormick (MKC) in facing the brunt of significant price increases.” Read more here
The strategies behind our Thematic Models:
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Consumer Inflation Fighters - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Precision Ag & Agri Science – Companies that look to address shrinking arable land by helping maximize crop yields utilizing technology, science, or both.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The strategies behind our Dividend Income Models:
Monthly Dividend Model – Pretty much what the name says – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.