Tech earnings hit pause button on market rally
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[February 03, 2023] By
Caroline Valetkevitch and Herbert Lash
(Reuters) - Big Tech led U.S. markets on a sharp rebound to kick off
2023. The message from their earnings on Thursday: not so fast.
Apple Inc, Google parent Alphabet and Amazon.com all posted results for
the end-of-year quarter that left a sour taste in investors' mouths. The
reports renewed questions about global economic demand, the effect of
higher interest rates and whether the market's January rally got ahead
of itself.
Nascent signs that consumer spending was beginning to rebound in China
were not enough to change that.
Apple, the world's largest publicly traded company, fell short of
expectations, hurt by lower iPhone sales and production disruptions in
China. Amazon said operating profits could fallthis quarter due to lower
demand, and Alphabet's online advertisers cut back their spend as well.
Shares of the three companies fell between 2.7% and 5% in premarket
trading and they were set to lose nearly $200 billion from their
collective market valuation. The drop also weighed on the wider market
following a euphoric rally Thursday. [.N]
"Maybe the tech stocks rallied a little bit too much into these numbers,
so the market will be taking a deep breath and saying, 'OK, well these
companies aren't bulletproof,'" said Daniel Morgan, senior portfolio
manager at Synovus Trust Company in Atlanta, Georgia.
These three firms and Microsoft, the four U.S. companies with
trillion-dollar market values, have led the broad-market S&P 500 in
2023. The index is up nearly 9% year-to-date, with Amazon gaining 34%.
Big Tech surged Thursday following a strong quarterly report from
Facebook-owner Meta Platforms Inc.
That's after the group was battered throughout 2022, trailing the S&P,
which dropped nearly 20%.
Some investors saw silver linings from Apple and other bellwethers,
including Starbucks, that reported results on Thursday. They noted that
lockdowns in China strangled sales for many companies in the world's
second-biggest economy, expecting a rebound in the coming year.
"When things started to reopen in December (in China), we did see an
increase in traffic to our stores as compared to November and an
increase in demand as December rolled around," Apple Chief Executive Tim
Cook told Reuters.
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The logos of Amazon, Apple, Facebook and
Google in a combination photo/File Photo
Cook said lockdowns in China hurt both production and demand, and
the company faced headwinds from the strong U.S. dollar that pushed
revenues lower.
“Currency was a headwind but will be a tailwind in Q1,” said Nancy
Tengler, chief executive of Laffer Tengler Investments in
Scottsdale, Arizona, referring to the dollar's weakening trajectory.
"The supply chain was a problem more so than demand, and that seems
to have been right-sized."
Similarly, Starbucks said comparable sales fell 29% from the
previous year in China, the company's fastest-growing market, but
that beginning in January, it saw "very encouraging" recovery
momentum there.
Other U.S. consumer bellwethers painted a mixed picture. Consumer
staples giant Clorox said product volumes fell in three of the
company's four business segments in the fourth quarter, while
automaker Ford said the year ahead was going to be a difficult one.
They, and other companies, are still grappling with higher interest
rates that are slowing demand. This year's surge in stocks has been
built on a rally in bonds, as lower yields make high-valuation
shares more attractive. Cost-cutting by Alphabet and Meta led some
investors to think that interest rates are affecting demand.
"In many respects we're waiting for that other shoe to drop – the
impact of higher rates on the economy, inflation, earnings and
jobs," said Jack Ablin, co-founder and chief investment officer at
Cresset Capital, which manages $30 billion. "Profits tend to trough
nine months after overnight rates peak and we haven't even seen the
peak in overnight rates yet."
(Reporting By Herbert Lash, Caroline Valetkevitch and David Gaffen;
writing by David Gaffen; Editing by Peter Henderson and Cynthia
Osterman)
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