Earnings Have Been Decent, But the Market Has Other Worries

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Earnings season is off to a decent start as key themes like Artificial Intelligence boost technology results. But other issues are weighing on the market.

Microsoft (MSFT), Amazon.com (AMZN), Alphabet (GOOGL) and Meta Platforms (META) all beat estimates. But they barely rose last week as investors worried about longer-term growth, interest rates and global risks.

MSFT had the cleanest beat as profit and revenue shot past estimates. The software giant showed a clear benefit from AI, which added 3 percentage points of growth to its key Azure cloud-computing unit. However, the guidance was less bullish. Management predicted revenue for the current quarter slightly below consensus estimates. CFO Amy Hood added that revenue from its Copilot feature will “grow gradually over time.” Copilot launches for enterprise customers starting on November 1, adding AI tools to existing programs like Word and Excel.

In summary, the numbers were good but overwhelmingly positive. The stock hit a two-month high after the results but gave back most of the gains. It ended the week up almost 1 percent.

AMZN performed a little better, advancing 2 percent on the week. Like MSFT, it benefited from cloud computing and AI. CEO Andrew Jassy sees “substantial, gigantic … opportunities” for the business as more developers use its platform to build AI tools. He added that AMZN has established itself as an early leader in the new field.

Margins were the other big theme. AMZN cut costs at both AWS and its e-commerce business, tripling profits. The company also grew advertising revenue by 26 percent — a newer way to monetize its huge web traffic. Still, revenue guidance for the current quarter (which includes the holiday-shopping period) was slightly below consensus.

In summary, AMZN’s topline growth wasn’t amazing. But it’s getting more profitable again and sees more benefit from the spread of AI.

Microsoft (MSFT), daily chart, with key events and patterns.

Alphabet, Meta

GOOGL and META dropped after their quarterly reports. Each had a clear area of potential risk.

META was the biggest gainer of the four this year when earnings season began (up 140 percent). Its numbers surpassed estimates, but management offered wide guidance for the current quarter as conflict in the Middle East threatened advertising revenue.

CFO Susan Li noted “softer ad spend” after the October 7 attacks on Israel. She added that the weakness resembled similar trends following the start of the Ukraine war last year.

GOOGL had the worst response to its numbers, suffering its biggest one-day drop since the pandemic. Earnings and revenue beat consensus thanks to strong performances at core businesses like Search and YouTube. However its Cloud business grew less than projected. Analysts viewed that as a sign GOOGL is struggling to add and retain large customers. There was also little clear progress on monetizing AI. In other words, it seems to be the opposite of trends at AMZN.

In summary, META faces potential risks from an advertising slowdown. GOOGL struggled the most because of weakness in the key long-term growth areas like AI and cloud computing. Investors disregarded strength in established areas like Search and YouTube, which are economically sensitive and may face headwinds from slower growth.

Alphabet (GOOGL), daily chart, with key events and indicators.

Solar Energy

Another theme this earnings season has been weakness in solar-energy stocks.

Enphase Energy (ENPH), which provides converter systems for residential systems, plunged after revenue and guidance missed estimates by a wide margin. The selloff mirrored a similar drop in rival SolarEdge Technologies (SEDG) last week.

Align Technology (ALGN) had the biggest drop in the S&P 500 last week after cutting its guidance and missing sales targets. The orthodontic company cited “decreased patient visits and increased patient appointment cancellations.”

Insurance broker Willis Towers Watson (WTW) rose the most after announcing better-than-expected results.

Another Losing Week

Biggest Gainers in the S&P 500 Last Week
Willis Towers Watson (WTW)+11%
Rollins (ROL)+9.2%
RTX (RTX)+9.1%
Capital One (COF)+8.3%
NextEra Energy (NEE)+8.2%
Source: TradeStation Data

All told, the S&P 500 fell 2.5 percent between Friday, October 20, and Friday October 27. It was the second negative week. More than two-thirds of the index’s members lost value.

Tensions in the Middle East and high interest rates promoted the selling. The 10-year Treasury yield fell slightly but remained near a 15-year high. It was boosted by a stronger-than-expected economic growth in the third quarter, which gives the Federal Reserve less reason to cut interest rates.

But geopolitics increasingly drove sentiment as Israel widened its attacks in Gaza on Friday.

Energy, Communications Lead the Selling

Energy stocks declined the most last week. Much of the drop followed weak quarterly results from Chevron (CVX).

The communications sector also fell, dragged down by GOOGL and META.

Utilities were the only major sector to gain, up 1.2 percent. They rebounded from sharp declines in late September.

Gold rallied to a five-month high amid tensions in the Middle East.

Charting the Market

The S&P 500 ended last week at its lowest level since May 24 and has declined in eight of its last nine sessions. Stocks have erased all their gains after Congress raised the debt ceiling on June 1.

The index is now in a potential price range between 4048 and roughly 4215. The lower level was a double bottom where prices bounced in late April and early May. The higher level is near the high in February and the low in early October. Friday’s close was also near a weekly support level around 4100 from mid-May.

Biggest Decliners in the S&P 500 Last Week
Align Technology (ALGN)-29%
Whirlpool (WHR)-21%
Hasbro (HAS)-18%
Enphase Energy (ENPH)-17%
FMC (FMC)-15%
Source: TradeStation Data

Chart watchers may consider the index oversold by measures like Wilder’s Relative Strength Index (RSI) and stochastics.

Sentiment has also been dismal. Just 29 percent of respondents described themselves as “bullish” in the American Association of Individual Investors’ latest survey. Some 43 percent were bearish. Both were the most negative outlooks since May. A separate survey by the National Association of Active Investment Managers was the most bearish in over a year.

Such polls are sometimes considered contrary indicators because they can reflect significant cash on the sidelines.

S&P 500, daily chart, with key levels and indicators.

The Week Ahead

This week is packed with major events — including a Fed meeting — and earnings. Attention will additionally focus on events in the Middle East.

McDonald’s (MCD) and Arista Networks (ANET) are two of the big quarterly reports today.

Amgen (AMGN), Advanced Micro Devices (AMD) and Pfizer (PFE) announce tomorrow. Consumer confidence is also due.

Wednesday morning brings ADP’s private-sector payrolls report, the Institute for Supply Management’s manufacturing report and crude oil inventories. Most importantly, the Fed announces monetary policy at 2 p.m. ET and holds a press conference 30 minutes later. The busy earnings agenda includes Qualcomm (QCOM), CVS Health (CVS), PayPal (PYPL) and Kraft Heinz (KHC).

Thursday brings initial jobless claims. Apple (AAPL) is the major earnings report. Other big names include Eli Lilly (LLY), Starbucks (SBUX) and Shopify (SHOP).

The week ends with non-farm payrolls and ISM’s service-sector data on Friday.

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