Market Musings 291022:
Hebdomas Horribilis for Big Tech
A horrible week for mega-cap growth… But hope on the interest-rate front?
SUMMARY
- Poor Q3 mega-cap tech results were heavily sanctioned by investors
- Predictable to some extent given consumer weakness and the strong US dollar
- And yet, S&P 500 and Euro STOXX 50 indices rebounded further on the week
- Long-term interest rates dipped, as markets hope for a pause in CB interest rate hikes
- Earnings forecasts have suffered most in Growth stocks, resisted best in Value stocks
PODCAST
Winners and losers from higher interest rates
- Why are central banks forced to raise interest rates when inflation goes up?
- What is the impact on savers and borrowers?
- What kind of companies benefit from rising interest rates?
- How long will the policy tightening cycle last?
- What is “financial repression”? Is it a good or a bad thing for financial markets?
- In this context, what should people invest in?
Retail investors Pasted by Q3 Tech Results
Disappointing third-quarter results for US mega-cap technology companies has triggered a renewed sell-off in Microsoft, Google, Amazon and Meta. Over the year to date, FAANG stocks have fallen 40%, with a 5% fall over the last week alone.
A Tough Week, indeed a tough Year for Mega-Cap Tech
Source: BNP Paribas
The twin pressures of a slowing US (and global) economy hurting investment and consumption on the one hand, plus the drag on US earnings from the continued strength of the US dollar, together conspired to slow earnings progression in these oligopolistic tech names.
Since late 2021, US mega-cap Tech has suffered
Source: tradingview.com
Of these US mega-cap tech names, Apple was the only one to really beat expectations in its Q3 results, with no disappointment evident in the sales of its flagship iPhone 14 model and with Q3 earnings ahead of analyst forecasts. This resulted in a near-6% gain for Apple over the last week, in sharp contrast to the other FAANG names.
US earnings expectations have drifted lower for some time
Analysts have been gradually reducing their full year 2022 and 2023 US earnings estimates in aggregate since the middle of June, in the face of a worsening growth outlook, higher costs (on the back of higher inflation) and the stronger US dollar (reducing the US dollar value of overseas profits).
According to Factset, S&P 500 aggregate expected…
