Today morning I went for my usual walk to neighborhood Farmer's market - it was pleasant cool spring morning with fog/clouds on the Evergreen hills! After brisk walk rewarded by bagel and Cappuccino, started thinking of last week's flurry of earnings results by tech giants, potential seizure of First Republic by FDIC and general direction of economy...that's the premise of this blog!
Last two weeks tech giants except Apple and Nvidia have reported. Here is quick report-card
- Tesla: OK but markets did not like constant price cuts to stimulate demand
- Alphabet: Earnings were good especially with GCP reporting profits first time. Google Cloud is about 11-12% of revenues and 25% of cost but growing at 20-30%. Clearly established itself as 3rd option. Markets would have preferred more clarity on cost cutting and plans to get into leadership position in Generative AI. So stock reaction was muted
- Microsoft: It delivered on all fronts with Azure still growing at 27%, buzz with OpenAI integration across all products and potential of BING taking market share from Google. No wonder stock reached 52 week high and could continue to grind higher
- Meta: This was the best of the lot. Markets loved results from "Year of Efficiency" and even better revenue growth. Mark Z's laser focus on cost cutting, focus on "core" apps, stabilization of ad markets and use of generative AI to help small merchants create ads are the factors which doubled the stock in less than 4 months and would continue to rise higher reaching over 300 in 2024 or before.
- Amazon: Markets initially liked the impact of cost cuts and AWS numbers. Being the biggest cloud provider, AWS sets the tone for overall cloud spending. Commentary during the earnings call about Apr trends reversed all the gains. Basically cloud spending is slowing down as many companies are either slowing down cloud migration or optimizing cloud spending.
- Apple: Next week it would announce..Most important number would be iPhone sales (as it has been for many years) and services growth. Given Apple's track record, it would beat again but market reaction would be similar to Google's earnings
- Nvidia: Generative AI have really excited the markets with this company and stock (along with Microsoft). No wonder it's up more than 70% YTD. Many analysts believe that there is no one even close to catching up with Nvidia in AI arms-race. That alone could prompt this stock to reach all time high in 2024 and could touch trillion $ market-cap.
Now let's look at economy and other factors...
Banking - another California bank which prided itself in serving high-tech clients would bite the dust and would be seized by FDIC and sold in pieces. This would be another biggest bank failure. 3 in 2023 vs 1 during 2008-09. Are there other dominos to fall?...Quick actions by FDIC and acknowledgment by Fed about its own mistakes as regulator have created relative calm in the markets...but hey, similar calm persisted after Bear Sterns collapse in March 2008 before storms re-appeared in summer leading to collapse of Lehman in Sept 2008. So it's "cloudy" out there in financial sector!
Economy grew 1.1% in Q1- the long awaited recession is still 2 quarters away (as it has been for last 4-6 quarters). It may just skirt the recession but under 2% growth is also not very exciting...so it would muddle thru sub-optimal growth. While employment and consumer spending is still strong, getting interviewed and hired in high-tech sector is getting difficult. So for the sector which has been major economic driver for US economy, it's "cloudy" out there!
Fed would increase interest rates by 25 basis points next week and keep the door open for another 25 hike for Jun meeting with caveat that it would be decided by economic indicators like employment, CPI etc. Fed is trying to communicate "don't expect rate cuts in 2023" to avoid markets getting ahead of itself. Let's see if Powell is successful in bringing markets and Fed on same page. It's "cloudy" out there for overall direction and terminal rate and period for Fed rates!
How will markets react to all of these? Apr kept its promise as one of the best month...but that brings us to seasonal factors. Historically markets have done worse during May-Oct period than Nov-Apr period. And that seasonal period starts tomorrow.....So for markets, it's going to be "Cloudy" out there!
In the meantime, NBA playoffs are in full swing with Warriors and Kings playing their Game 7 today. Kings have played wonderfully with young players like Monk and Fox! But for me it's going to be "Go Warriors" since I would like to see Lebron-Curry Matchup!
/Shyam
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