Earnings Outlook: Markets Shake Off Tech Weakness for Now

Summary

• Despite the big tech selloff, the S&P 500 rallied 4% last week thanks to a tailwind from mostly solid earnings reports.
• But the problems that hit the big tech sector last week – soft advertising, slower holiday spending, and weak consumer demand for electronics – will persist. We look for further weakness in tech and the broader market in coming months.
• We suggest taking advantage of the rally to reduce equity exposure.
• It will be a heavy week ahead: about a third of our Russell 1000 universe report.

What We Learned Last Week

The S&P 500 (SPX) rallied 4% last week to 3901 on the back of mostly solid earnings reports. Even the NASDAQ 100 was up 2% despite soft results and outlooks from the largest tech companies, including Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOG) and Meta Platforms (META).

Investors are fixated on backward-looking earnings reports and clinging to hope that the Fed will soon hit the pause button on raising rates. Once earnings season runs its course after next week, we expect attention will return to the Fed and inflation (if not before).

The non-farm payroll report on Friday will give some clue whether employment (and by extension the economy) is starting to slow – although Hurricane Ian could lead to some distortion to both the downside and upside. Recall that once the cleanup after major storms gets underway, economic activity and demand increase – two things the Fed does not want to see.

Earnings and outlooks from Big Tech show the unwind from the pandemic lockdowns is still in full swing. Ominously for retailers and consumer goods companies, Amazon forecast sluggish sales for the upcoming holiday season. Advertisers have been pulling back from traditional media for some time; as GOOG reported, they are now cutting back in the digital sector. Microsoft (MSFT) sales of its Windows operating system dropped 15% due to weak demand for PCs.

The key point is that these are not one-time hits. These various issues will persist until the Fed has done what it needs to do and we have passed the bottom of the trough into which the economy is gradually sinking. Whether that continues to be a gentle slide or become a sudden drop remains to be seen.

We continue to be bearish on equities with an underweight in our overall asset allocation framework. We suggest investors take advantage of the rally to reduce positions if they can.

We discussed some of the emerging macro trends from earnings reports in a note late last week.

The Week Ahead

Apart from the always eagerly-awaited nonfarm payroll report on Friday, 350 Russell 1000 and 163 SPX companies report earnings this week. That will take the tally of companies to have reported to 85%.

Monday

• Car rental giant Avis Budget Group (CAR) will provide an update on business and vacation travel and perhaps how they are managing their fleets considering (finally) declining used car prices.
• Lattice Semiconductor Corp. (LSCC) and On Semiconductors (ON) are smaller players in this sector but may indicate the outlook for semiconductors and the impact of President Joe Biden’s ban on tech sales to China.
• Several large energy companies report this week:
  • Williams Co (WMB) today.
  • Chesapeake Energy (CHK) and Devon Energy Co (DVN) tomorrow.
  • Marathon Oil (MRO) on Wednesday
  • ConocoPhillips (COP) on Thursday.
• Of particular interest will be if any of them say they are increasing production given high energy prices and OPEC+ plans to cut production.

Tuesday

• Advanced Micro Devices (AMD) will surely follow Intel (INTC) and others with a weak outlook.
• Airbnb (ABNB) may give some indication where people are traveling to.
• Does Louisiana-Pacific (LPX), supplier of building materials to homebuilders, see a bottom to the housing market?

Wednesday

• How is the front of the store faring at CVS Health Corp.’s (CVS) many pharmacies?
• eBay (EBAY) has become a bit of a quaint website, but it could indicate whether rising costs are pushing people to try to auction their excess stuff, especially that accumulated over the past two years.
• Or are they storing it somewhere? Public Storage (PSA) (Tuesday) and Life Storage (LSI) and National Storage (NSI) today may have something to say about that.
• The New York Times (NYT) gives another (probably negative) take on advertising demand, especially for the post-election season.
• Qualcomm Inc. (QCOM) is active in both the weak semiconductor sector and advanced communication technology that has so far has enjoyed strong demand from corporations looking to upgrade their equipment. How is their business shaping up?
• Internet-based real estate broker Zillow Group (ZG) will be closely watched for any new information about the housing market and prices.

Thursday

• Cummins Inc. (CMI), manufacturer of high-tech engines, may indicate how quickly logistics companies are moving to cleaner energy systems.
• Are people still relying on Doordash Inc (DASH) to deliver dinner or are they cooking more at home?
• Expedia (EXPE), Hyatt Hotels (H) and Marriot International (MAR) should confirm what the airlines are saying – people are planning to travel during the upcoming holiday season.
• But we guess Royal Caribbean (RCL) and Norwegian Cruise Line Holdings (NCLH) results will show cruises are not a top destination.
• Peloton Interactive (PTON) will surely attract far more press attention than its $2.7bn market cap warrants, if only because it was worth $54bn not so long ago.
• Warner Brothers Discovery’s (WBD) results and outlook should shed light on how it is faring in the streaming wars – or more to the point, whether it is attracting subscribers and advertising dollars.
• Starbuck’s Corp. (SBUK) is probably doing well despite higher coffee prices and labour shortages.
• The more interesting question may be whether fashion sportswear maker Under Armour (UAA) is struggling with inventory problems.

Friday

• Hershey Co (HSY) will likely confirm that the nation’s collective sweet tooth has not fallen victim to higher prices.
• Several major utilities report today, including Con Edison (ED), Dominion Energy (D), Duke Energy Corp. (DUK), and PPL Corp. (PPL). They may have interesting remarks about energy prices and the transition to clean energy.

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)