Tech Giants Slide in Late Trading After Earnings: Markets Wrap

(Bloomberg) — A $245 billion exchange-traded fund tracking the Nasdaq 100 dropped in late hours, with traders weighing results from two of the tech giants that have powered the rally in stocks amid the artificial-intelligence frenzy.

Alphabet Inc. sank after reporting revenue from its core search advertising business that fell short of estimates, overshadowing an otherwise strong end to the year. Microsoft Corp.’s cloud growth disappointed some on Wall Street — even as the company posted its strongest revenue growth since 2022.

The stakes are high for tech earnings after a surge in valuations spurred warnings about an overheated market and turned AI into a “show me” story. Five megacaps with a combined market value of over $10 trillion report results this week. Those firms, along with the other members of the so-called Magnificent Seven, carry a nearly 34% premium to the S&P 500 in terms of forward price-to-earnings, according to data compiled by Bloomberg.

Aside from big tech, traders also sifted through a batch of economic data and awaited the Federal Reserve rate decision. Wall Street had to digest a hotter-than-estimated reading on job openings, which left investors guessing what Jerome Powell will say Wednesday as the market further trimmed bets on a March Fed cut.

“Tomorrow may be significant for markets as the cross-currents of big-tech earnings, the ADP jobs report, the distribution of Treasury issuance, and Powell comments meet at a critical juncture,” said Jose Torres at Interactive Brokers. “I’m expecting Powell to take some rate cuts off the table by perhaps even calling the current projections aggressive.”

Other notable news in late trading were: Advanced Micro Devices Inc. — which gave a weak revenue forecast — and Starbucks Corp. — whose sales rose at their slowest pace in a year and earnings missed Wall Street’s estimates. Walmart Inc. announced a three-for-one stock split.

The S&P 500 was little changed on Tuesday, while the Nasdaq 100 underperformed, with Apple Inc. leading losses in megacaps. Traders also waded through results from an economic barometer — United Parcel Service Inc. — which tumbled on a disappointing outlook. The courier plans to cut 12,000 jobs. Financial shares gained after a bullish analyst call on major US banks. Treasury two-year yields rose while 10-year yields fell.

A survey conducted by 22V Research shows 38% of respondents expect Wednesday’s Fed meeting/presser to be “risk-on,” 39% are betting on a mixed or negligible reaction and only 23% said “risk-off.” On aggregate, investors are paying more attention to payrolls (59%) than the Fed (41%) this week, according to the tally.

Swap contracts referencing the March Fed meeting date — the next one after this week’s — now show about a third of a 25-basis-point drop. Late last year, a quarter-point cut in March was completely priced in, reflecting expectations for labor-market cooling that have failed to materialize.

US job openings unexpectedly rose in December to the highest level in three months while fewer Americans quit their jobs. Tuesday’s data kicks off a slew of releases that will offer insights into the state of the labor market. A report due Wednesday is forecast to point to easing employment costs at the end of 2023, while the government’s jobs report Friday is projected to show US employers added around 185,000 positions in January.

“The job market holds the keys to future Fed policy,” said Jeffrey Roach at LPL Financial. “In addition to the solid job market, uncertainty over the impact from Red Sea shipping disruption adds pressure to the Fed as they prepare markets for rate cuts.”

Separate data showed US consumer confidence increased in January to the highest level since the end of 2021 as Americans grew more upbeat about the economy and the job market amid more sanguine views about inflation.

“For the Federal Reserve — as most data releases are now interpreted through the lens of the Fed — concern is centered on whether a more confident consumer could ignite another bout of inflation,” said Quincy Krosby at LPL Financial. “Still, consumer confidence is key to whether the economic landscape remains robust helping to ensure a soft landing.”

As valuations have improved meaningfully during the “Fed pivot rally,” there’s now considerable risk of volatility, according to Lauren Goodwin at New York Life Investments. 

“But if 2023 taught investors anything, it’s that timing the market is incredibly difficult, and sitting it out even when investors call for recession or volatility is not likely to be the best allocation approach,” she noted. “As a result, we believe investors will have to be increasingly focused on quality and yield.”

Jonathan Krinsky at BTIG noted that a basket of 50 companies that “matter most” to hedge funds is about as extended on a daily basis as it’s been over the last two decades. Many of these holdings are semiconductors, megacap tech and communication services, he said.

The gauge’s Relative Strength Index is close to 81 — seen by many chartists as a sign of an overbought market.

“As we enter the heart of EPS season along with a significant amount of macro, we would be cautious in chasing extended names here as the risk of an unwind, either during or after these events, remains quite high in our view,” Krinsky noted.

The dominance of the 10 biggest stocks is increasingly drawing similarities with the dot-com bubble, raising the risk of a selloff, according to JPMorgan Chase & Co. quantitative strategists. 

The share of the top 10 stocks on the MSCI USA Index, including all of the so-called Magnificent Seven tech stocks, has risen to 29.3% by the end of December, the strategists wrote. That’s just moderately below the historical peak share of 33.2%, which occurred in June 2000. Furthermore, only four sectors are represented in the top 10, compared to the historical median of six, the strategists said.

Corporate Highlights:

• Figure AI Inc., a startup developing humanlike robots, is in talks to raise as much as $500 million in a funding round led by Microsoft Corp. and OpenAI, according to a person with knowledge of the matter.
• Nasdaq Inc. is planning to cut hundreds of jobs as it integrates software provider Adenza into its business — an acquisition it closed last year amid efforts to propel a new phase of expansion at the firm.
• PayPal Holdings Inc. will reduce its workforce by about 9% as Chief Executive Officer Alex Chriss, who took over in September, grapples with rising competition, profit pressures and a raft of analyst downgrades.
• Activist investor Nelson Peltz believes Walt Disney Co. can achieve profitability in streaming by bundling its ESPN+ online service with a larger player interested in sports, such as Netflix Inc., according to people familiar with the matter.
• Boeing Co. withdrew a request for a key safety exemption that would have helped speed approval of its coming 737 Max 7 aircraft, bending to rising pressure to prioritize safety in the wake of a near-catastrophe on one of its planes.
• General Motors Co. beat Wall Street expectations for the fourth quarter and expects profits this year to grow on improved sales as the US economy chugs along.
• JetBlue Airways Corp. is evaluating deeper cost cuts, delaying aircraft and reworking its flight network in an effort to return to profitability in the wake of the near-collapse of its planned purchase of Spirit Airlines Inc.
• Pfizer Inc. reported fourth-quarter profit that beat analysts’ estimates as the US government returned fewer doses of its Covid-19 treatment than predicted.

Key events this week:

• China non-manufacturing PMI, manufacturing PMI, Wednesday
• Japan industrial production, retail sales, housing starts, Wednesday
• Bank of Japan issues summary of opinions from January policy meeting, Wednesday
• Boeing announces earnings amid US government safety probe, Wednesday
• Federal Reserve interest rate decision and Fed Chair Jerome Powell’s news conference, Wednesday.
• US Treasury quarterly refunding, Wednesday.
• China Caixin manufacturing PMI, Thursday
• Eurozone S&P Global Manufacturing PMI, CPI, unemployment, Thursday
• US productivity, construction spending, ISM Manufacturing, initial jobless claims, Thursday
• Apple, Amazon, Meta, Deutsche Bank, BNP Paribas earnings, Thursday
• Bank of England interest rate decision, Thursday
• US employment report, University of Michigan consumer sentiment, factory orders, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 was little changed as of 4 p.m. New York time
• The Nasdaq 100 fell 0.7%
• The Dow Jones Industrial Average rose 0.3%
• The MSCI World index was little changed

Currencies

• The Bloomberg Dollar Spot Index was little changed
• The euro rose 0.1% to $1.0844
• The British pound fell 0.1% to $1.2696
• The Japanese yen was little changed at 147.60 per dollar

Cryptocurrencies

• Bitcoin rose 0.9% to $43,565.51
• Ether rose 2.9% to $2,373.9

Bonds

• The yield on 10-year Treasuries declined four basis points to 4.03%
• Germany’s 10-year yield advanced three basis points to 2.27%
• Britain’s 10-year yield advanced two basis points to 3.90%

Commodities

• West Texas Intermediate crude rose 1.4% to $77.82 a barrel
• Spot gold rose 0.1% to $2,036.09 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Jessica Menton, Ryan Vlastelica, Elizabeth Stanton, Michael Mackenzie, Isabelle Lee and John Viljoen.

©2024 Bloomberg L.P.