Meta's Q1 Gets a 'Like,' But Soft GDP, Incoming Jobs Data Could Change the Subject

Yesterday dashed hopes that solid mega-cap tech earnings could shake the market out of its funk. Today tests the same proposition following a strong showing late Wednesday from Meta Platforms Inc (NASDAQ:META).

Thursday’s earnings calendar is jam-packed, and we also saw the first government Q1 Gross Domestic Product (GDP) estimate and weekly jobless claims. This afternoon features Amazon (NASDAQ:AMZN) (AMZN) earnings, followed by critical inflation data tomorrow. If you blink, you might miss something big.

Many investors probably wish they’d blinked yesterday, when major indexes mostly couldn’t hold on to early gains following Microsoft Corporation's (NASDAQ:MSFT) better-than-expected earnings. Worries surged about First Republic Bank (NYSE:FRC) (FRC), which reportedly is seeking a possible rescue deal from other lenders. In addition, disappointing Consumer Confidence and Leading Economic Indicators data raised fresh recession fears, sending the S&P 500® index (SPX) to four-week lows.

To rub salt in the wounds, investors face likely rate increases next week from both the Federal Reserve and the European Central Bank (ECB).

Despite all that, stocks have a firmer tone this morning in premarket trading amid a flurry of fresh earnings reports. Among the reporting companies, shares of American Airlines (NASDAQ:AAL) (AAL), Merck (MRK), Eli Lilly (NYSE:LLY), and Honeywell (NASDAQ:HON) (HON) all moved higher before the opening bell, and shares of META rose 12%. Treasury yields also rose slightly, suggesting a bit more investor confidence than we saw yesterday.

• The 10 Year Treasury Yield rose 3 basis points to 3.46%.
• The U.S. Dollar Index ($DXY) fell slightly to 101.38.
• The Cboe Volatility Index® (VIX) futures eased to 17.96.
• WTI Crude Oil (/CL) rose slightly to $74.50 per barrel but remains near one-month lows.

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GDP: The government’s first estimate for Q1 Gross Domestic Product (GDP) was a lowly 1.1%, well below the consensus for 2% growth and also a steep drop from 2.6% in Q4. At first glance, the number suggests recent weak data is taking its toll. Consumer spending was the report’s strong suit. It increased for both goods and services.

That was offset, however, by declines in private inventory investment (related to business investment in machinery and equipment) and residential fixed investment, the Bureau of Economic Analysis (BEA) said. While the BEA didn’t spell it out, the report might provide more evidence that higher interest rates pushed down business activity.

Slower GDP growth generally isn’t good news for stocks, but today’s data might reinforce investor impressions that the Federal Reserve could be forced to pause or even cut rates later this year.

Weekly initial jobless claims of 230,000 were a bit below analysts’ consensus of 245,000 but still up from average levels earlier this year, implying the jobs market continues to slow.

Earnings Highlights:

• HON, the giant industrial company, raised guidance and beat Wall Street’s expectations. The quarterly growth got a boost from aerospace sales, which rose 14%. As Barron’s pointed out, aerospace has been a growth driver this quarter for other companies as well, including Boeing (NYSE:BA) (BA) and General Electric (NYSE:GE) (GE).
• MRK beat analysts’ earnings estimates and shared higher-than-expected guidance despite a drop in revenue as COVID-19-related sales fell. Cancer antibody treatment Keytruda delivered 20% revenue growth.
• AAL, like other airlines reporting so far this quarter, forecast solid demand and said international flights remain popular. The company barely beat Wall Street’s earnings per share estimate and came up just short of analysts’ average revenue estimate, but shares managed slight premarket grains.
• Caterpillar (NYSE:CAT) (CAT) shares fell ahead of the open despite the machinery maker posting what appeared to be healthy results. The construction division grew 10%, with 33% growth for that division in North America. CAT looks like its benefitting from U.S. infrastructure spending after passage of major legislation in Congress last year.
• Roku (NASDAQ:ROKU) (ROKU) shares are pretty quiet, but the digital media player company beat on revenue despite a challenging macro environment for advertising.

Facebook (NASDAQ:META) parent Meta (META) joined this week’s parade of mega-caps outpacing earnings expectations yesterday afternoon. Shares almost instantly popped 12% in premarket trading.

Q1 revenue rose 3% to $28.6 billion, which wasn’t huge growth in the great scheme of things but was META’s first increase in nearly a year. Stronger advertising—about $1 billion ahead of Wall Street’s estimates—helped lead META out of the red after a 4.5% revenue drop in Q4. Analysts had expected revenue of $27.61 billion, below last year’s $27.91 billion. META also raised guidance for the current quarter.

Another thing driving shares after the report was META’s forecast for dropping expenses. With digital ad sales under pressure from changes in the market and competition, META’s been laying off employees and taking other cost cutting measures, a big reason why its stock rose 70% so far this year after getting slammed in 2022. The company calls 2023 its “year of efficiency,” and yesterday’s earnings helped reinforce impressions of progress.

This afternoon is Amazon’s (AMZN) turn in the spotlight following three other mega-cap tech companies that reported this week.

Earnings from Microsoft (NASDAQ:MSFT) (MSFT) and Alphabet (NASDAQ:GOOGL) (GOOGL) raised hopes for a solid AMZN quarter, fueled by those firms’ strong cloud sales. AMZN’s Amazon Web Services (AWS) is by far the largest cloud platform, way ahead of MSFT and GOOGL. Though both those platforms did better than expected, industry growth overall continues to slow—a possible challenge for AMZN’s biggest business driver.

Still, cloud growth in the high 20s on a percentage basis from both GOOGL and MSFT cheered AMZN investors Wednesday, judging from the stock’s performance. Analysts point out that AMZN’s cloud lead is so big over its rivals that their gains aren’t necessarily upsetting anyone at AMZN’s Seattle headquarters. Instead, it raises hopes that AMZN can leverage what appears to be an improving climate. Quarterly AWS growth of 20% in Q4 was short of Wall Street’s expectations, but a sequential gain from that, if it comes, might receive a hearty greeting.

Like the rest of the tech industry, AMZN is under pressure to cut costs. The company has announced roughly 27,000 job cuts since November, including for cloud-related employees. Despite signs of slower spending, the stock itself hasn’t enjoyed the kind of big gains seen by MSFT and Apple (NASDAQ:AAPL) (AAPL) early this year. That could be partly due to AMZN’s retail business, which sagged 2% in Q4. Other consumer-oriented companies reporting so far this quarter cited shopper resilience, which might be an advantage for AMZN today.

Analysts expect Q1 earnings per share of $0.21.

Price check: Tomorrow morning brings a critical inflation reading ahead of next week’s Federal Open Market Committee (FOMC) meeting. Core Personal Consumption Expenditure (PCE) prices are the Fed’s preferred measure of inflation, and March’s release is expected to show a 0.3% month-over- month gain, says Collin Martin, a director of fixed income strategy at the Schwab Center for Financial Research. That’s still high, as it comes to an annualized rate above 3.5%. Headline and core PCE both rose 0.3% month-over-month and 4.6% year-over-year in February.

Rates up next: Whether Friday’s PCE data beats or misses expectations, it’s unlikely to sway the Fed either way at next week’s meeting. As of this morning, the probability of a 25-basis-point rate hike in May stands at 77%, according to the CME FedWatch Tool.

Small-caps lag: The Russell 2000® (RUT), which has more exposure to the domestic economy than other indexes, is the worst performing major index of 2023, down 1.8% year-to-date. The Nasdaq 100® (NDX), which has the most exposure of any index to info tech, is up 17% in 2023. The much broader SPX is still up 5.6% since the start of the year despite recent softness.