Earnings Outlook: Will Big Tech Make or Break the NASDAQ 100?

Summary

• So far equities have shrugged off mostly negative company outlooks, preferring to focus on better times (and maybe lower rates) in H2 2023.
• The steel industry is the lone bright spot, reporting a resurgence of orders and rising demand from the auto industry and infrastructure spending.
• A trifecta of the tech A-team – Alphabet, Amazon and Apple – report on Thursday. They may well determine whether the NASDAQ 100 keeps recovering or beats another retreat.

What We Learned Last Week

Equity markets mostly continued to find the silver lining in economic and earnings reports last week, as the S&P 500 rose 2.5 and broached 4000. The NASDAQ 100 posted an impressive 4.7% gain despite an atrocious earnings report and outlook from industry bellwether Intel (INTC). The GDP report showed steady growth; the PCE deflator dropped another notch, from 5.5% YoY to 5%, while core PCE was down 0.3% to 4.4%, stoking hopes of a 25bp rate hike and lower rates in H2.

The challenge to this optimism comes from a steady stream of negative outlooks for the next quarter or two – and little or no visibility about H2. Among the themes we are seeing from last week’s flood of earnings:

Volumes hit hard – The consumer staples sector is running into increasing cost-related headwinds. Kimberly Clark (KMB), Procter and Gamble (PG) and spice-maker McCormick Co pushed through price hikes of 10% – and saw volumes drop a significant 7%. Dental product giant Colgate Palmolive experienced a 4% drop in volume. Clearly consumers are resisting higher prices.

Ad spend still soft – Comcast (CMCSA) revealed soft advertising spend on its networks. The British Sky division ad revenue dropped 9%. In the US, cable-related ad revenue was up 9.1% – but down 7.1% ex political ads (due to midterm elections) and World Cup broadcasting. Significantly, CMCSA did not say an advertising rebound was in the cards.

Rail traffic flat – Railroad companies Norfolk Southern (NSC), CSX (CSX), and Union Pacific (UNP) all essentially said 4Q shipping volume was roughly flat or down slightly after sharper declines in 3Q – but gave no indication of a rebound in volumes.

Consumer electronics deeply depressed – Intel (INTC) said 1Q revenue would be $10.5-11.5bn – some 20% less than analysts’ projections of $14 bn. EPS is expected to be -0.15 versus forecasts of 0.25. Some of this is INTC specific, but the key message is that PC demand and consumer electronics remain deeply depressed. We anticipate other consumer-oriented tech companies will report similar problems. The silver lining (if any) must be that chip inventories will be depleted and demand will return at some point – maybe sooner rather than later?

Steel industry rebounding – That seemed to be the case for steel manufacturers Steel Dynamics (STLD) and Nucor (NUE). Both missed on revenue and earnings, but offered bullish outlooks for 2023. After weathering a collapse in demand in H2 2022, both companies said demand is picking up and appears firm. One CEO said he could not understand why everyone else seems to be gloom and doom. Primary drivers for steel are expected to be the auto industry, where auto production could rise from 14 million to over 15 million cars; infrastructure spending; and a need to rebuild depleted inventories. This was the lone sector to report an optimistic outlook.

Equity markets may be anticipating that inventory corrections will soon run their course in many other industries, giving rise to similar bouncebacks despite gloomy outlooks.

Interest expense rising – One little problem – two companies specifically mentioned that rising interest expense will be a bigger problem in 2023. In 2022, interest rates rose from exceptionally low levels; in 2023, they will be high by the standards of most of the 21^st century. We expect more companies will be mentioning this issue.

The Week Ahead

About 190 companies in our Russell 1000 universe report next week. Among them are several FANG-tech companies, including Alphabet (GOOG), Apple (APPL), and Amazon AMZN). They will either validate the NASDAQ 100 rally or deflate it. Ford (F) and General Motors (GM) will provide key updates on their semiconductor supply chains and their electric vehicle rollout plans. Caterpiller’s (CAT) order book will give clues for capital spending plans in the US and globally.

Monday

• Appliance maker Whirlpool (WHR) will likely offer a bleak outlook about the housing sector.

Tuesday

• Semiconductor manufacturer AMD probably will not report good news but is unlikely to beat INTC in the race to the bottom.
• Caterpiller (CAT) provides the equipment to build infrastructure and new buildings globally. Its order book may indicate whether recovery or slowdown scenario is more likely.
• Corning Inc (GLW) provides key components to the PC industry – but also fiber optic cables to industry, so its order book will also be of interest.
• General Motors (GM) (and Ford (F) on Thursday) may indicate whether the steel makers are right about rising auto production in 2023.
• Exxon Mobil (XOM) will almost surely announce plans to return yet more cash to investors.
• PulteGroup Inc (PHM) may confirm the message from other homebuilders – housing is depressed but can still operate profitably.
• Given recent retail sales and consumption data, if United Parcel Service (UPS) manages to report rising package volumes it will likely be because it is gaining market share.

Wednesday

• Meta Platforms (META) will be the marquee earnings report of the day. Mark Zuckerberg will likely try to convince us yet again that the metaverse is on the edge of exploding, even though he surely will not deliver numbers to support his case. But our interest will be primarily in how advertising revenue is faring.
• Several healthcare industry companies report today, including Boston Scientific (BSX), Humana (HUM), McKesson Corp (MCK) and Thermo Fisher (TMO). Of interest will be growth plans now that the Covid bonanza has run its course.
• Peloton Interactive (PTON) will attract interest far beyond what its $4.3 bn market cap merits.

Thursday

• Alphabet (GOOG) will tell us what is happening with internet advertising.
• Amazon (AMZN) will tell us whether its various deals are spurring internet shopping.
• Apple (AAPL) will tell us if the consumer electronics consumption drought is affecting its sales.
• Are Harley Davidson motorcycles still a must-have item as consumer spending slows?
• Parker Hannifin (PH), maker of industrial and aerospace automation and control systems, will likely confirm that companies are still investing in automation and technology.
• Qualcomm (QCOM) will add to the gloom about semiconductors and consumer electronics.

Friday

• News Corp (NWS) provides another window on the advertising market.
• Madison Square Garden (MSGS) probably will benefit from the ongoing shift in consumption from stuff to going out and having fun.

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.)