Economy

Analysis-Tech wreck shows U.S. Megacaps are not immune To the corrosive Fed tightening By Stocksak


© Stocksak. FILE PHOTO – The Amazon logo is shown in front of a decreasing stock chart in this illustration, taken April 29, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Caroline Valetkevitch, Lewis Krauskopf and Sinéad Carew

NEW YORK (Stocksak – The disappointing earnings of the megacap companies that have led markets higher for years is sending a disturbing message about a U.S. economic system that, until recently, had seemed to be surviving a barrage interest rate hikes.

Amazon (NASDAQ:) was the latest corporate giant that delivered bad news. It said on Thursday that rising costs could reduce profits for the current quarter. Its shares dropped 17% in extended trades, wiping $190 Billion from its market capitalization.

Amazon’s latest report was the latest alarming announcement by tech-focused companies, which command large weightings in stock indices and are almost ubiquitous in investor portfolios.

“From a markets standpoint, you have to remain cautious going forward,” said Michael O’Rourke (chief market strategist at JonesTrading). “They are the largest stocks in the market, but we haven’t seen much of anything positive out of any of their shares.”

Facebook (NASDAQ) parent Meta Platforms shares fell Thursday after disappointing investors with its costly metaverse bets. Google-parent Alphabet, (NASDAQ:), missed Wall Street’s target of revenue growth in the third trimester because ad sales were weak. Microsoft (NASDAQ;) reported its slowest topline growth for five years due to inflation and a strong dollar.

Even Apple (NASDAQ):, whose revenues and profits exceeded Wall Street targets on Thursday, reported lower iPhone sales than analysts expected.

At Thursday’s closing, Apple’s shares were down 18% for 2014, surpassing the 20% year-to date loss in the. Meta leads the declines in terms of a fall of about 70%.

Many see the growth giants in the United States as indicators of how corporate America is doing during a year of high inflation. This has led to the Federal Reserve enacting a series of rate hikes of enormous proportions that have roiled markets and raised concerns about a recession.

These disappointing results indicate that even the largest U.S. businesses are feeling the effects a tighter Fed policy, a rising dollar, and persistent inflation.

According to Daniel Krieter (a strategist at BMO Capital Markets), the selloff of megacap shares “indicates how the Fed’s restrictive policy is beginning be felt in real economic, with growth slowing meaningfully.” “Now we are waiting to see if the Fed can achieve soft landing. It will be very difficult.”

As it fights the worst inflation for decades, the Fed has already increased rates by 300 basis points this fiscal year. Investors expect another 75 basis points increase at next week’s monetary policy meeting. However hopes that Fed officials might soon slow down the pace are what have buoyed stocks in October.

“Big tech companies can’t withstand slowdowns in economy, especially if their consumer-driven approach is used,” Rick Meckler said, a partner at Cherry Lane Investments. Cherry Lane Investments is a family investment office located in New Vernon, New Jersey.

He stated that the Fed’s planned slowdown is affecting some of their consumer-facing businesses and, given their high multiples, it is causing large contractions in their stock market prices.

ERODING PROFITS

Despite the fact that resilient corporate profits have been a bright spot in a dark year, recent disappointing results are raising doubts about how long it can last.

Based on results from 227 of the S&P 500 companies as of Thursday morning and estimates for the remainder, third-quarter earnings are now projected to have risen just 2.5% compared with an estimated gain of 4.5% on Oct. 1, according to IBES data from Refinitiv.

“Amazon and other big tech companies continued to hire people to support a business that looks like 2021. It’s not 2021.” It’s 2022,” Kim Forrest (Chief Investment Officer at Bokeh capital Partners) said. “Layer on Top of This Inflation. People are buying less stuff.”

Despite big stock price drops, some investors still see more pain in tech-focused names.

UBS Global Wealth Management’s analysts issued a Thursday morning update, citing a number of reasons for caution. These included still-high earnings expectations due to higher inflation and a stronger dollar.

They wrote that even though tech stocks have had a disappointing year, they don’t believe that the sector’s headwinds are fully priced in to the market.

News Source and Credit

Stocksak Editorial

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