Microsoft, Alphabet Earnings Loom as Fed Meets, Industrial Earnings Impress

 | Jul 25, 2023 09:30AM ET

(Tuesday market open) This afternoon serves up a double-feature, and it’s not “Barbenheimer.”

Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) accelerate the mega-cap earnings season by reporting today after the close, followed by Meta Platforms Inc (NASDAQ:META) tomorrow. This beams the spotlight on some of the most widely followed tech businesses including cloud computing, artificial intelligence (AI), and, in the case of Alphabet and Meta, internet advertising.

Texas Instruments (NASDAQ:TXN) also reports today, and Intel (NASDAQ:INTC) is due later this week, along with results from a host of energy, pharmaceutical, and industrials firms. All told, nearly one-third of S&P 500 companies are on the docket over the next four days, meaning earnings season will be half-finished by Friday afternoon. Next week is packed, too.

Additionally, Tuesday kicks off the Federal Open Market Committee’s (FOMC) two-day meeting, with a rate decision scheduled for tomorrow at 2 p.m. ET. A quarter-point increase is baked into futures trading. The question is, what’s next?

U.S. stocks were subdued overnight and ahead of the opening bell, but China’s stock market surged on Tuesday. This lent strength in premarket trading to some of the Chinese stocks listed on U.S. exchanges including Alibaba (NYSE:BABA) and JD.com (NASDAQ:JD). Beijing’s announcement of new measures to spark private investment, a form of stimulus for the sluggish economy, powered gains.

Gains were fairly broad-based on Monday, with the S&P 500® Index (SPX), Dow Jones Industrial Average ($DJI), Nasdaq Composite (COMP), and small company-focused Russell 2000 (RUT) all moving higher. The $DJI is now up 11-straight sessions, the longest streak since early 2017. Strength in the $DJI and the RUT partially reflect recent solid performance by the financials sector.

h2 Morning rush/h2
  • The 10-year Treasury note yield (TNX) ticked up 3 basis points to 3.89%.
  • The U.S. Dollar Index ($DXY) rose slightly to 101.43 and is up each day over the last week.
  • Cboe Volatility Index® (VIX) futures were steady at 14.01.
  • WTI Crude Oil (/CL) is flat at $78.83 per barrel.
h2 Stocks in Spotlight/h2
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Industrial might: Quarterly results this morning—dominated by industrials sector firms—generally exceeded Wall Street’s expectations. Some of the companies that beat the average analyst estimate on both top- and bottom-lines included Alaska Air (NYSE:ALK), Dow (DOW), General Electric (NYSE:GE), General Motors (NYSE:GM), and Kimberly-Clark (NYSE:KMB).

Verizon (NYSE:VZ) surpassed Wall Street’s earnings per share (EPS) estimate but fell short on the revenue side. Still, the telecommunications stock rose in premarket trading in part thanks to solid broadband subscribership gains.

GM’s results easily beat Wall Street’s estimates and the company raised guidance for fiscal 2023. GM targets being able to build 1 million electric vehicles (EV) annually in North America by 2025.

3M (MMM) also beat estimates and raised guidance. Sales fell by 2.2%, but that was better than analysts’ estimates of a 4.5% decline.

Generally, the industrials sector—one of the better performers of the last month—posted solid earnings this morning. Forward earnings projections from the sector are also on a tear.

Microsoft on deck: Shares of Microsoft recently hit all-time highs but have since leveled off a bit. AI and the cloud likely are what investors want to hear about from the company when it reports today after the close.

While AI is the theme of the moment, it’s important not to underestimate the value of the company’s cloud business. Though Microsoft is second in this arena to Amazon (NASDAQ:AMZN), its latest results and forecast could provide a first read into overall corporate demand for information technology (IT).

The year began with widespread concerns about an IT spending dip, though the AI excitement helped tech companies forge huge market gains. Last week’s soft forecast by Taiwan Semiconductor Manufacturing (TSM) reignited those old worries about a slower global economy’s impact on IT spending. We may find out today whether Microsoft supports that thesis, as well. Meanwhile, Goldman Sachs (NYSE:GS) sees Microsoft’s Azure cloud revenue rising 27% year-over-year in the quarterly report today, which would be a solid performance.

Texas Instruments also reports this afternoon. In its last earnings call, the semiconductor and integrated circuit maker’s executives said they saw signs of demand improving.

Ads clouding Alphabet? Ad spending has been a weak spot for tech so far this year, and in Alphabet’s most recent quarterly earnings call, executives cited a “challenging” economic environment and an “uncertain” outlook. Revenue growth retreated to the low single-digits in recent quarters as advertisers pulled back. Alphabet announced the layoff of 12,000 employees earlier this year.

While the company’s Q1 results beat Wall Street’s expectations, its 3% revenue growth didn’t exactly knock the ball out of the park. Analysts expect Alphabet to report Google ad revenue of $57.45 billion in Q2, according to Bloomberg.

h2 Eye on the Fed/h2

Futures trading indicates a nearly 100% probability that the FOMC will raise interest rates by 25 basis points at the conclusion of tomorrow’s meeting, according to the CME FedWatch Tool.

The mystery isn’t so much what the Federal Reserve will do tomorrow, but what it might signal for the next meeting in September. The market enters today’s FOMC gathering with high expectations of a September pause, but it wouldn’t be surprising to hear a hawkish spin both in the committee’s post-meeting statement and during Fed Chairman Jerome Powell’s press conference.

“The Fed won’t be so quick to declare victory on inflation,” says Kevin Gordon, senior investment strategist at the Schwab Center for Financial Research. “Members of the FOMC had a chance to cheer the June Consumer Price Index (CPI) data, but the fact that some members reaffirmed their call for two more hikes means there isn’t widespread agreement that the inflation beast has been slain, and there will likely be more dispersion in members’ views moving forward.”

The European Central Bank (ECB) and Bank of Japan (BOJ) also meet this week. The ECB is seen raising rates by another quarter-point, according to a Reuters survey of analysts, but the BOJ is expected to keep policy unchanged.

h2 What to Watch/h2

Data on tap: Key headlines to watch include The Conference Board’s Consumer Confidence reading today, New Home Sales figures on Wednesday, Q2 Gross Domestic Product (GDP) estimate on Thursday, and Personal Consumption Expenditure (PCE) prices on Friday. PCE prices arguably outweigh the other numbers in terms of potential market impact because it’s the Fed’s preferred inflation meter.

Confidence vote: The Conference Board’s Consumer Confidence report for July, due out today after the open, has big shoes to fill after June’s eye-popping leap to 109.7. The Expectations category improved to 79.3 in June, but readings below 80 are associated with recession. Consensus for the headline is 111.5, according to Trading Economics.

Balance beam: Wall Street’s rally has widened recently, but investor sentiment has some “frothiness.” Read more about current market conditions in the latest post from Schwab’s Chief Investment Strategist Liz Ann Sonders and Senior Investment Strategist Kevin Gordon.