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Tech stocks are taking a beating this week as they prove less resilient to the economic downturn than investors had hoped they would be.
What’s Happening: Dreary earnings results from Google parent company Alphabet (GOOG) and Microsoft (MSFT) weighed down markets on Wednesday, showing how this year’s $5.5 trillion selloff has not yet bottomed out. The tech-heavy Nasdaq ended the day down 2%. Then, Facebook parent company Meta Platforms (FB) reported weaker-than-expected results after market close, sending its shares down 20% in premarket trading.
The big picture: We’re in the thick of third-quarter earnings season, and so far, things haven’t been too bad. Major banks mostly met or beat expectations, and Netflix (NFLX), which took a walloping earlier in the year, even showed a nice rebound. Markets rallied late last week into early this week on that earnings momentum.
But disappointing earnings from Big Tech stocks have the tendency to turn the broader market south thanks to their immense market value.
Beyond determining market sentiment, tech earnings also offer important clues about where the economy is heading. That’s because the forward-looking, multinational industry is particularly sensitive to inflation, rising interest rates and a strong dollar.
So far, what we’re seeing is rattling investors. Alphabet, Microsoft and Meta Platforms reported that a slowing global economy was battering their businesses.
Microsoft beat expectations but reported its slowest revenue growth in five years on Tuesday as rising energy costs and the strength of the US dollar cut away profits. In particular, sales growth in the cloud business – one of the company’s biggest bright spots in recent years – was lower than analysts had hoped. Its fiscal second-quarter forecast came in short of Wall Street estimates, sending shares down 8% on Wednesday.
Alphabet, meanwhile, missed earnings expectations as ad sales slowed to their slowest rate of growth since the pandemic-induced recession. Profit has dropped 27% since last year, and the company’s stock fell nearly 10% on Wednesday
Alphabet CEO Sundar Pichai warned that the company would have to be “responsive to the economic environment,” indicating that cost-cutting measures like layoffs are coming.
Meta Platforms also reported an earnings-per-share miss and saw revenue slip about 4.5% from the same period last year. The company, which owns Facebook, Instagram and Whatsapp, warned Wall Street that its growth forecast for the rest of the year would be lower than previously expected and that layoffs and cost cutting were coming.
The bottom line: “Meta, Alphabet, and Microsoft should be able to deal with ups and downs in revenue growth, as long as they can remain productive,” said Columbia Business School professor Dan Wang, but in the current environment “there is little evidence that these companies can maintain the same level of productivity.”
Big Tech soared to new heights over the past decade as the companies enjoyed a low-interest rate, low inflation environment. That’s no longer the case. These earnings signal that it won’t be for some time.
Housing slowdown accelerates
Sales of newly constructed homes dropped 10.9% in September from August and were down 17.6% from a year ago, according to a joint report from the US Department of Housing and Urban Development and the US Census Bureau.
“New home sales took a hit in September, beaten down by rising mortgage rates that now hover around 7%,” said Robert Frick, corporate economist at Navy Federal Credit Union. “Both inventories and new home prices remain high, so a drop in mortgage rates and prices would likely trigger a rush to buy, but we shouldn’t expect such conditions until next year at the earliest.”
Until that happens, there will be a mismatch between high prices and buyers’ budgets, said Kelly Mangold of RCLCO Real Estate Consulting.
“Motivated buyers who are able to stomach the rate increase or who may be buying in cash are encountering a much less competitive buying landscape than earlier this year,” she said.
Bonuses for Wall Street come tumbling down
Wall Street bonuses are expected to fall by at least 22% this year after last year’s big payouts, according to a new report from New York State Comptroller Thomas DiNapoli.
A slowing economy, geopolitical chaos and heightened inflation have all worked to dry up the number of IPOs and mergers and acquisitions made on Wall Street. That means that the fees investment bankers collect have taken a nosedive from their 2021 records.
“The last two years of profits and bonuses fueled in part by the extraordinary federal response to the pandemic were not sustainable,” DiNapoli said. “As the sector slows down in 2022, leading firms are reviewing staffing and office space needs and a prolonged downturn could negatively impact state and city coffers.”
Wall Street firms’ pretax profits for the first half of the year were $13.5 billion, DiNapoli said. That’s a 56% drop from the $31 billion earned in the same period last year.