The past week has witnessed a flurry of earnings reports from major technology companies, and despite demonstrating solid performance, the accompanying guidance has created a shroud of uncertainty for the economic outlookCoupled with elevated yields on U.STreasury bonds, this has instigated persistent volatility in the stock market, culminating in a significant sell-off on October 26, when all three major U.Sindices fell below their 200-day moving averages.
The Nasdaq Composite Index experienced a drop of 1.8%, and large tech stocks were not spared from the downturnFinancial releases from Google and Meta showed quarterly earnings that surpassed expectations; however, the market's skepticism regarding their future performance dampened the positive impact of these figures
Following the earnings announcements, Meta's shares slid nearly 4%. Furthermore, Amazon's third-quarter results showcased revenue and profits that exceeded forecasts, with cloud services (AWS) income showing a modest acceleration compared to the previous year, yet they paled in comparison to competitors such as Microsoft and GoogleMarket reactions during the earnings call resulted in a decline of Amazon’s stock price.
In a compelling twist, stronger-than-expected GDP growth in the U.Swas reported at an annualized rate of 4.9% in the third quarter, exceeding the anticipated 4.5%. This marked the fastest growth rate since the peak of the recovery in 2021. Nonetheless, this news was not well-received by the stock market, as it suggested that the Federal Reserve’s hawkish stance might remain in place for a longer period
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While there remains optimism about a strong seasonal performance for U.Sstocks from October to December, the path to recovery appears laden with uncertainty.
Fears About Fourth-Quarter Guidance from Tech Giants
All Three Major U.SIndices Hit Four-Month Lows on Thursday
As previously mentioned, investors should be alert to whether the market has reached a turning point, where elevated bond yields and a steepening yield curve could weigh negatively on the high valuations of growth stocks
The seven-tech giants—dubbed the 'Magnificent Seven' (Mag7)—comprising Amazon, Alphabet, Apple, Nvidia, Meta, Microsoft, and Tesla, have become synonymous with this bullish market phase, accounting for one-quarter of the S&P 500's market capitalization.
Since the beginning of this year, both the Nasdaq 100 index and S&P 500 index had witnessed significant rebounds, nearly reaching 50% and 30%, respectively, with these large-cap tech stocks contributing most of the gainsHowever, apart from Nvidia, the other companies within the Mag7 are struggling to keep up with or marginally surpass nominal economic growthThe valuation premiums have now risen above levels witnessed during the initial rebounds following COVID lockdownsWarning signs are emerging, suggesting a decline in the dominance of the Mag7, showing an average drop of 11% since summer peaks
Therefore, even though the third-quarter earnings report from tech giants was relatively strong, the market's tolerance appears to be waning; in simpler terms, any slight disappointment in performance will lead to harsher penalties for stock prices compared to before.
On October 26, all three major U.Sstock indices struck four-month lows, with the S&P 500 falling below the 200-day moving average, closing at approximately 4137.23. The Nasdaq 100 index fell 189 points to 14,109, reflecting an 11% decline from its yearly high despite an almost 50% rebound earlier in the yearThis persistency in decline is primarily driven by the underperformance of several large tech stocks and investors grappling with disappointing earnings reports.
On the preceding day, the three major indices collectively fell, with the Nasdaq diving over 2%. A stark example was Alphabet, whose shares tanked nearly 10%—their largest single-day drop since the pandemic—due to disappointing revenue figures from its cloud business
In contrast, Microsoft’s intelligent cloud sector continued to exhibit industry-leading performance, causing its stock price to rise by 3%. However, Microsoft’s strong presence wasn't sufficient to counter the prevailing pessimistic sentiment in the market.
Specifically, Alphabet, which faced its largest drop since March 2020, reported earnings per share of $1.55, marking a 46% year-on-year increase, while quarterly revenue hit $76.6 billion, representing an 11% increaseOperating income was reported at $21.3 billion, up 24% from the previous year.
Breaking it down by segments: the total revenue from Google's services amounted to $67.9 billion with a year-on-year increase of 10.7%; of this, Google’s ad revenue was $59.6 billion, reflecting a growth of 9.4%; Google search and other channels generated $44.0 billion, a growth of 11%; YouTube ad revenue climbed to $7.9 billion with a growth of 12.4%. However, the significant drop in stock price stemmed from Google’s cloud revenue, which reached $8.4 billion, an uptick of 22.4% year-on-year (down from 28% in the previous quarter).
Overall, Alphabet's ad revenue grew by 9.5%, contributed by its cloud operations, resulting in total revenue growth of 11%, which still comes up short compared to Microsoft’s 40%+ growth and Apple’s 30%+. That said, these are significantly superior figures relative to other industries, where even Tesla only saw a 14% growth.
Alphabet still holds a commanding lead in more than 90% of the global search engine market share
Despite Microsoft being the first to launch AI-enhanced search capabilities, Alphabet is not poised to relinquish its leading spot and has been catches up within the AI domainThus, one of the factors contributing to the recent market drop was the inflation of its valuation following multiple months of gains.
Meta, which also released its earnings report shortly thereafter, saw its stock plummet despite impressive performanceMeta's third-quarter revenue grew by 23% year-on-year, reaching $34.15 billion, surpassing the prediction of $33.51 billionIts diluted earnings per share skyrocketed from $1.64 last year to $4.39, significantly exceeding analysts' expectations of $3.60. Nonetheless, this slightly positive story was overshadowed by warnings from management about the uncertain revenue prospects for 2024, despite the platform's ad pricing hitting a significant low after a dramatic decline over the past 18 months.
Meta is currently keeping a tight rein on costs while simultaneously investing in emerging areas such as AI and augmented/virtual reality headsets, pinning hopes on AI to reshape its business model
Nevertheless, management indicated it is premature to discuss profitability at this pointWith investors seemingly more concerned about future outlook rather than current results, this led to a decline in Meta's stock by over 3%, which also contributed to the Nasdaq hitting its four-month low.
In a similar vein, Amazon posted strong results yet saw its share price drop due to disappointing fourth-quarter guidanceAmazon's third-quarter revenue rose by 13% year-on-year to $143.1 billion, exceeding the market's expectation of an 11% rise to $141.4 billion, up by 6.5% from the previous quarterHowever, the guidance for fourth-quarter net sales range is seen as lackluster, with the company projecting between $160 to $167 billion – with the midpoint at $163.5 billion representing a year-on-year increase of less than 10%, nearing historical lows and falling short of market estimates of $166.6 billion.
Robust Economic Data and U.S
Treasury Yields
Continuing Pressure on Risk Assets
Another critical factor weighing on the market is the stance of the Federal Reserve, accompanied by the ongoing rise in U.STreasury yields impacting risk assets significantly.
The U.Seconomy recorded an incredible GDP growth of 4.9% in the third quarter, vastly surpassing the previous value of 2.1% and the anticipated 4.3%. This growth was primarily driven by consumer spending, inventory adjustments, and government expenditure
Additionally, orders for durable goods rose 4.7% in September, surpassing the expected 1.7% increase.
The resilience of U.Sconsumers has come as a pleasant surpriseThe figures indicate that consumer spending contributed the most to growth, seeing an increase of 4%, with goods up by 4.8% and services up by 3.6%. This puts the Federal Reserve in a difficult position heading into next week's meeting where it is likely to maintain a hawkish postureCurrently, there are expectations that even if the Fed opts against raising interest rates in November, a rate increase in December remains a possibility, and the likelihood of interest cuts may not materialize until the latter part of 2024 with potentially only two reductions.
Last week, initial jobless claims in the U.S
reached their lowest level in nine months at 198,000, indicating that the labor market remains robustFollowing the release of this data, Powell made public comments where he implied a cautious approach (aligning with expectations of no rate rise in November) while simultaneously indicating the continuing possibility of future rate hikes in light of the recent robust economic data.
Additionally, the recent surge in oil prices may affect future U.Sinflation, consequently impacting the Fed's interest rate trajectory and exerting further pressure on the stock indicesOn October 26, WTI crude oil prices dipped to around $83.40, retracing all gains made on October 25. U.Scrude oil inventories increased by 1.37 million barrels, exceeding the expected rise of 239,000 barrels
However, due to unresolved geopolitical tensions and the impending winter heating season, oil prices are likely to remain elevated.
From a technical perspective, oil prices have bounced back three times this October from around $82.30, a level that represents a 38.2% retracement of the bullish trend that spanned from May to SeptemberThe robust U.Seconomic growth has bolstered market confidence, preventing bearish influences from dominating, but the downward trend established since September and the weekly chart pattern suggest that the current rally in oil prices may be limitedBulls will keep an eye on previous highs around $85.50 and near the $88 markThere are still predictions from major Wall Street firms that oil prices could approach $100.
Notably, the yield on the U.S
10-year Treasury bond briefly touched 5% last week, later hovering near 4.9%, marking the highest level since 2007. In contrast, the short-end 2-year yield fell from its peak back below 5.2%, bringing the yield spread close to zero, with signs of easing inversion within the yield curve, which seems to suggest a significant decrease in the probability of a U.Srecession.
The rise in long-term yields has tangible repercussions on the economy, as investors are enticed by the high returns on U.STreasury purchasesThis shift diminishes the attractiveness of other risk assets, leading to pressure on equities and other risk investments.
Breaking Below the 200-Day Moving Average
U.S
Stocks Must Avoid New Low for Three Months
From a technical analysis perspective, the Nasdaq 100 index witnessed its largest single-day decline of 2023 on October 26, stagnating at a four-month low and breaching a support level that had persisted since JuneThe index had previously managed to avoid new lows for almost three months, but current indications confirm that the bearish trend initiated in July continuesShould this downward trajectory persist, the next indicator of support may not surface until around 14,200 pointsFor bullish traders, the focus is on whether the index can recover to the support zone above 14,400. To reach new heights, it will need to surpass 14,750 points.
(This article represents the author's personal opinion and does not reflect the position of this publication