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Has all of the bad news been priced into the market? Have stocks finally reached bottom, again? Stocks closed out Friday on a strong note, booking strong gains for the day and for the week, suggesting that “yes” might be the answer for both of the questions. The trading action this past week was spurred by, among other things, investor optimism that the Federal Reserve would be less hawkish after its November meeting.
Friday’s activity, following last week’s yearly lows, showed not only an aggressive return to risk assets, but also to the high-growth names which were beaten up amid recession fears. This week’s continued resurgence has investors seemingly more confident in the upcoming earnings results, particularly in tech stocks. All eleven S&P sectors finished the day in positive territory. Of the roughly 21% of S&P 500 companies have reported earnings so far, almost three-quarters have beaten analyst expectations, marking a strong start to the third quarter earnings season.
The Dow Jones Industrial Average jumped Friday, rising up 748.97 points, or 2.47%, to end Friday’s session at 31,082.56. Among the Dow’s notable gainers were Apple (AAPL), Salesforce (CRM), Microsoft (MSFT) and Walt Disney (DIS). The S&P 500 added 86.97 points, or 2.37%, finishing at 3,752.75, while the tech-heavy Nasdaq Composite gained 244.87 points, or 2.31%, to close at 10,859.72. The Nasdaq was powered by, among others, the 8% rise in shares of Netflix (NFLX) and an 3.45% gain in Tesla (TSLA).
Compounded by Friday’s rally, all three major averages ended with strong weekly gains. Leading the way was the tech-heavy Nasdaq Composite which closed out the week with a gain of 5.2% higher. The Dow Jones Industrial Average added 4.8% for the week, while the S&P 500 rose 4.9%. The main question heading into the week is whether this recent rally will continue, particularly as Big Tech comes into focus with Apple (AAPL), Amazon (AMZN) and Microsoft (MSFT) slated to announce their results?
While it’s still early in the earnings reporting cycle, the guidance they provide for the current quarter and beyond will reveal their level of confident and ability to navigate inflationary headwinds. Here are the names to keep an eye on for this week.
Alphabet (GOOG , GOOGL) – Reports after the close, Tuesday, Oct. 25
Wall Street expects Alphabet to earn $1.26 per share on revenue of $70.68 billion. This compares to the year-ago quarter when earnings came to $1.40 per share on revenue of $65.12 billion.
What to watch: Shares of the Google and YouTube parent have fallen 31% year to date, underperforming the 23% decline in the S&P 500 index. The stock has fallen 13% and 24% in the respective three months and six months, while only slightly outperforming the losses in the tech-heavy Nasdaq Composite during that span. Amid various macroeconomic concerns such as rising inflation, the tech conglomerate has suffered a slowdown in digital advertising. This is likely to persist given the recent drop in Snap (SNAP) which recently released results of a brutal third quarter that missed Street’s estimates. That said, execution hasn’t been an issue for Google. In the last two years, the company’s quarterly reports have beaten revenue estimates for eight consecutive times, while missing on profit estimates just once in that span. For this quarter, however, the Street forecasts a 9% year-over-year drop in EPS, while revenue is estimated to grow at about 8.5% compared to the same quarter in 2021. Digital advertising, which includes YouTube ads, Search ads and Network ads, remains the company’s major revenue and profitability driver. Google’s advertising business grew 12% last quarter to $56.3 billion, but advertising is expected to see some weakness. On Tuesday, assuming prolonged slowing trends in the digital ad business, investors will look to see if Google’s cloud business, which currently accounts for less than 10% of Google’s total revenues, can be a strong offsetting factor.
Microsoft (MSFT) – Reports after the close, Tuesday, Oct. 25
Wall Street expects Microsoft to earn $2.31 per share on revenue of $49.73 billion. This compares to the year-ago quarter when earning were $2.27 per share on $45.32 billion in revenue.
What to watch: The market continues to remains broadly bullish on Microsoft, particularly for this quarter ahead of its fiscal 2023 Q1 earnings report. The company’s fast-growing Azure cloud platform and the Intelligent Cloud business are cornerstones of what is expected to be another banner year. Microsoft forecasted a revenue range of $20.3 billion to $20.6 billion in Intelligent Cloud revenues in the first fiscal quarter. Of that total, the mid-point assumes 20% year-over-year growth, compared to revenues of $17 billion in the year-earlier period. Just as impressive, Azure and cloud services grew revenues 40% year over year in the last-reported quarter. Likewise, investors expect Azure to have sustained strong growth in the just-ended quarter. That’s not the same for the PC business, however, which has experienced some weakness. Tech research firm Gartner estimates PC shipments to have declined roughly 20% in this third quarter, which could pressure Microsoft’s Personal Computing business and possibly its Windows revenues, which declined 2% year-over-year in the last quarter due to inflationary pressures, supply chain challenges, and a slowing PC market. Nevertheless, these headwinds aside, Microsoft still has plenty of growth runway ahead from these well-established trends. On Tuesday, the company’s guidance will gauge how confident management feels about its growth potential and the company’s ability to navigate through these challenges.
Meta Platforms (META) – Reports after the close, Wednesday, Oct. 26
Wall Street expects Meta to earn $1.89 per share on revenue of $27.41 billion. This compares to the year-ago quarter when earnings came to $3.22 per share on revenue of $29.01 billion.
What to watch: Amid the recent tech selloff, Meta shares have been punished, falling 35% and 58% in the respective six months and nine months. Down 61% year to date and 62% over the past year, it would seem the market no longer believes in the company’s growth capabilities. Slowing user growth and advertising growth at its core Facebook and Instagram products have scared investors away. As we discussed above with Snap’s earnings, the market is bracing for another tough quarter from Meta’s digital ad business. But even amid inflationary cost pressures and struggles with daily active users, Meta can still beat profit expectations which are low. Heading into the quarter, Meta stock was listed among Citigroup’s top picks in the Internet space. Analysts Ronald Josey said Meta presented a “compelling” risk/reward opportunity at current levels. Josey who has a Buy rating on the stock with a $222 price target price, implying 67% upside, says Q3 expectations are “relatively muted given industry chatter around engagement, social media competition, and monetization.” In other words, Meta should easily beat the Street estimate. The company on Wednesday will nonetheless need to show improvements in its Reality Labs, demonstrating that the business can emerge as Meta’s profit center that it is expected to become.
Apple (AAPL) – Reports after the close, Thursday, Oct. 27
Wall Street expects Apple to earn $1.27 per share on revenue of $88.9 billion. This compares to the year-ago quarter when earnings came to $1.24 per share on revenue of $83.36 billion.
What to watch: Apple shares have not performed as well as investors would have liked, but the company is doing a solid job navigating through the various headwinds that have impacted its business. Supply chain disruptions and rising inflation have been among the things that have pressured the company’s revenue and profits. Last week the company reportedly cut production of its iPhone 14 Plus model less than two weeks after it debuted on October 7 at a price of $899. However, according to The Information, Apple was said to be reevaluating demand for the product, of which two of its iPhone 14 Plus suppliers cut their production by 70% and 90% respectively. It remains to be seen whether there are any significant revenue impacts for this quarter, or for the holiday quarter. But this wouldn’t be the first time Apple has adjusted production on any of its products to pair with demand. It’s worth noting that the iPhone 14 Pro and iPhone 14 Pro Max are not subjected to production cuts. Both models currently have long wait times, suggesting strong demand. Last week, Loup Ventures analyst Gene Munster noted that lead times for iPhones are actually running higher than normal for this stage in the product cycle. As such, Munster concluded that Apple’s business “continues to do well” despite macro pressures. While Apple stock has held up better than the S&P 500, down just 19% year to date, compared to 23% decline for the S&P 500, there is still plenty of value in this quality name. Investors are hoping for more clarity and conviction on the bullish thesis on Thursday.
Amazon (AMZN) – Reports after the close, Thursday, Oct. 27
Wall Street expects Amazon to earn 22 cents per share on revenue of $127.57 billion. This compares to the year-ago quarter when earnings came to 31 cents per share on revenue of $110.81 billion.
What to watch: Amazon’s decelerated profit growth has been one the key reasons for the stock’s struggles so far this year. The company’s investments its workforce, along with research and development, has taken a sizable portion of what would have otherwise fallen to its operating income bucket. These expenses, along with the recent expansion of its data centers and logistics capabilities, have hurt its bottom line, culminating in a Q1 reported loss of $3.8 billion. Not only was this its first quarterly loss in seven years, its operating income fell from $8.9 billion to $3.7 billion, while its operating margin dropped by 5% to 3.2%. In response, Amazon stock has gotten punished, falling some 45% from its 52-week high of $188 (split adjusted). But fast forward two quarters later, investors expect a different story. Shares have risen close to 10% over the past week because investors are anticipating the company’s aggressive spending to eventually bear fruit. Not only will these investments help widen Amazon’s competitive moat, but Amazon is poised to deliver strong returns on these investments, while delivering sustained cash flow generation. On Thursday beyond a top- and bottom line beat, investors will want strong profit guidance to support the long-term return on investment thesis.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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