Equities and the MacroSphere: Messaging Is Make or Break
- By John Tierney
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Summary
- This earnings season is a lot about messaging. Meta Platforms (META), Alphabet (GOOG), and Microsoft (MSFT) all beat expectations and promised AI spending. However, META collapsed for saying it will be a while before realizing a return on its investment.
- There are signs industrial companies are finally running down inventories and will have to replenish them throughout 2024 – helping maintain the recovery.
- Equity indices will likely be on hold this week given a Federal Reserve (Fed) meeting and Friday’s labour market report.
- It is another big week for tech earnings, with Apple, Amazon, AMD, Super Micro Computer and Qualcomm reporting.
Market Implications
- Look for volatility in the tech sector depending on what companies say about how and where their AI ambitions are going.
What We Learned Last Week
This earnings season seems to be a lot about messaging.
The prime example is Meta versus Microsoft and Alphabet. All three reported impressive beats on revenue and earnings as well as plans to increase AI spending.
But META was down 11% on the week while GOOG was up 9%. MSFT initially jumped 5%, ending the week with a modest 0.5% gain.
The difference? META said it could take several years to generate returns on its investments. GOOG and MSFT said they were already profiting on their AI technology.
META has a track record of pouring huge sums into new products no one knows they need let alone want – as Mark Zuckerberg’s efforts to jumpstart his vision of the metaverse shows. But we suspect Zuckerberg has learned that lesson.
Possibly META is talking apples and GOOG/MSFT are talking oranges.
GOOG/MSFT are talking about the state of the art in AI now. Current AI is either not very good (female popes? Native Americans living in 19th century Germany?) or is an enormous front end making computers do what they have done for years. Stuff like completing your sentence, writing basic computer code, and searching Google for the perfect link near the top of the list. Maybe it is a tad faster. Maybe it makes some of these features more accessible to less tech-savvy people. But nothing new here.
Meanwhile, META is talking about developing a far more advanced generative AI. GOOG/MSFT are spending untold sums trying to do that too. They are just not telling us.
It is all about the messaging.
Do Not Disappoint Us!
We also see a pattern of any disappointments getting punished.
Intel (INTC) missed on revenue but posted a solid beat on earnings. It has tried talking up how its current and forthcoming chips can be used for AI processing – but it also delivered a soft outlook that sent its stock down 10% on the week. Clearly investors are unconvinced Intel has prospects beyond x86 chips for PCs.
Motorcycle manufacturer Harley Davidson (HOG) posted solid beats on revenue and earnings, but the stock dropped 11% on the week due to rising dealer inventories and a decline in gross margins. We see this as another sign consumers are cautious about spending on big ticket items.
Earthmover equipment manufacturer Caterpillar (CAT) has mostly surprised on the upside for the past several years, but it finally missed on revenue and offered a soft outlook for demand from the construction and resources industry.
On the other hand, chemical manufacturer Dow Inc. (DOW) beat on revenue and earnings – and said it expects demand from industrial customers to pick up throughout 2024 after slumping in the past year.
Altogether, investors are not turning away from equities despite the pressure of inflation and high rates. But the S&P 500 and NASDAQ 100 are expensive too, so investors are taking profits and leaving companies that appear to offer limited upside.
If CAT and DOW are any indication, there may be a rotation starting in the industrial sector as there is finally a need to replenish inventories. On balance, the economy continues firing on most but not all cylinders.
The Week Ahead
We expect equity indices will be on hold this week as markets await a Fed meeting and press conference on Wednesday and the monthly labour market report on Friday. Individual companies may also react to earnings.
It is another big tech lineup, with Amazon (AMZN – Tuesday) and Apple (AAPL – Thursday) reporting.
But the most eagerly awaited report will likely be Super Micro Computer (SMCI – Tuesday), which sold off a massive 22% when it failed to release a preliminary revenue report earlier this month. This is expected to be weaker than analysts have projected. SMCI has more than tripled in 2024 because its servers are very attractive for AI processing.
Advanced Micro Devices (AMD – Tuesday) hopes to cash in on demand for powerful chips needed for AI processing.
SMCI and AMD would do well to message carefully.
A variety of consumer-oriented companies report too, including Domino’s Pizza (DPZ), Coca-Cola (KO), McDonald’s (MCD), Norwegian Cruise Lines (NCL), and Starbucks (SBUX)
In other reports this week.
Monday
- Avis Budget Group (CAR)
- Domino’s Pizza (DPZ)
Tuesday
- Amazon (AMZN)
- Advanced Micro Devices (AMD)
- Coca-Cola (KO)
- McDonald’s (MCD)
- PayPal (PYPL)
- Super Micro Computer (SMCI)
- Starbucks (SBUK)
- 3M (MMM)
Wednesday
- Carvana (CVNA)
- CVS (CVS)
- Kraft Heinz (KHC)
- Marriot International (MAR)
- Norwegian Cruise Line (NCL)
- Qualcomm (QCOM)
Thursday
- Apple Inc. (AAPL)
- Booking Holdings (BKNG)
- Coinbase (COIN)
- Conoco Philips (COP)
- Expedia (EXPE)
- Moderna (MRNA)
- Peloton (PTON)
Friday
- Hershey (HSY)