On Monday Nvidia (NVDA) hit an all-time high. For 2023 through November 17, Nvidia and the other 6 stocks in the Magnificent Seven–Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT), Amazon (AMZN), Meta (META), and Tesla (TSLA)–have gained more than 70%. The other 493 stocks in the Standard & Poor’ 500 are up 6% for that same period.
I’m trying to decide if we’re watching a legitimate rally or a classic bear trap. If this rally is real, and likely to run for a while, investors should be putting cash to work even at market highs. If it’s a bear trap-you know one of those upward moves designed to pull in cash from the sidelines just before green turns to red in the market, then you ought to be using this moment as a selling opportunity, taking profits, and building cash for better barging down the road. A new survey by Goldman Sachs shows concentration in big tech stocks is at a record high. What does that mean?
Investors see a ton of third-quarter earnings reports this coming week with news from Microsoft, Amazon, Meta Platforms, and Alphabet quite capable of moving the entire market. We’ll also get more consumer company (Coca-Cola and Kimberly-Clark for example) reports to show whether last week’s higher revenue but lower volume pattern continues. And Wall Street is expecting negative new from oil companies ExxonMobil (XOM) and Chevron (CVX) when they both report on Friday.
Now that Fed day is done and behind us, we return to our regularly scheduled programming. Back on September 15, I posted “A tough day for tech–Part 1” after news on Taiwan Semiconductor Manufacturing (TSM) reporting that the company was slowing orders with suppliers of chip making equipment because of sluggish demand for chips from its customers. Now onto Part 2 of bad news for tech stocks.
Not all price increases are equally sticky.
Some jumps in cost are likely to get countered quickly because the goods or services in question exist in highly competitive marketplaces. And competitors are likely to cut prices to gain market share as soon as that’s feasible.
Other prices are sticky and unlikely to get rolled back quickly if at all. Much of this stickiness results from markets that act as oligopolies where companies don’t compete on price but instead follow the lead of their competitors in pricing higher and higher. The stickiness of inflation matters a great deal right now because it’s a big factor for the Federal Reserve in figuring out how many interest rate increases will be necessary to tame inflation. The stickier inflation is the higher the Fed will have to raise interest rates. From this perspective, the recent round of price increases from package shipping companies–from pretty much all of them–is bad news indeed for the Fed and inflation.
Earnings. Earnings. And more earnings. From the big bellwether technology stocks: Apple, Amazon, Microsoft, Meta Platforms, and Alphabet. Wall Street has already slashed earnings forecast for these stocks so there’s a good chance these companies will report earnings that surpass expectations even if only by a few pennies. By and large, though, these reports will show either an absolute drop from the September quarter of 2021 or, at best, a slowing of revenue and earnings growth. Key to the market’s reaction will be what these companies say about expectations for the next quarter or two. Will they emphasize what are already clear slowdowns in PC and smartphone sales? Will they speak to the elephant in the room–the U.S/China trade war? Will they say that a strong dollar plus inflation is cutting into sales outside the United States and U.S. sales to domestic customers who are showing signs of “price fatigue”?
The Standard & Poor’s 500 was on track for a decent day–the index was up 0.79% at 12:43 p.m. New York time–and then Bloomberg broke a story, picked up everywhere, reporting that Apple (AAPL) intended to slow hiring and reduce spending growth next year. The S&P 500 finished the day down 0.84% and Apple shares closed down 2.06%.
My one-hundredth-and-thirtieth YouTube video “Market gives Fed a razzberry” went up today. Yesterday, the Fed announced that it would raise rates by 50 basis points but that it was not looking to raise by 75 at the June or July meetings. In response, the market had a huge rally, especially in tech stocks, as it had b been widely assumed that those meetings would see the larger 75 basis-point increase. All that has changed today, when upon second thought the market no longer likes this news, with the S&P 500 and NASDAQ Composite giving back all the gains they made yesterday plus a little more. I look at a few specific stocks, like Amazon and Advanced Micro Devices, and talk about why I think the selloff in tech stocks is going to continue.
My one-hundredth-and-twenty-seventh YouTube video “Lessons from Amazon” went up today. In this video I’m looking at Amazon’s (AMZN) earnings report after hours on April 28. The company delivered its first quarterly loss in 7 years. The shares closed down 14.05% the next day. I think that the questions Amazon is facing are important across the economy as we emerge from a Pandemic. For example, looking at Pandemic sales trends do you invest in fulfillment and shipping infrastructure to maintain consumer expectations for quick delivery or do you hold back on spending on the likelihood that post-Pandemic trends will revert to lower pre-Pandemic patterns? Amazon’s decision to invest in building out fulfillment, and its flat sales numbers, led to this quarterly loss. Other companies such as Uber, DoorDash, Netflix, Peloton, and Starbucks face the same issues going forward.
Going into this earnings season, the hope was that strong, surprisingly strong perhaps, earnings from the big growth stocks would put a stop to the selling. Earnings would be strong enough to convince investors that the market wasn’t over-valued since at these growth rates stocks would be seen to be quick growing into current extended valuations That hasn’t exactly worked so far. But this week the earnings story from growth stocks hits its stride. If the companies reporting this week can’t make the case for growth stock earnings, there probably isn’t a growth stock story to be made in the light of Federal Reserve interest rate increases, supply chain disruptions, and fears of a recession.
In this post let me take another step back to look at the one of the larger economic forces revealed by the Netflix miss. I’d argue that the Nexflix miss should put pricing power and questions of what price increases will hurt demand up near the top of your stock picking check list. Especially since the streaming service’ loss of 200,000 subscribers this quarter and the ported loss of 2 million subscribers next quarter qualifies as just the first shoe to drop.
