Microsoft's Big Quarter Cheers Investors

(Wednesday market open) When it’s earnings season, the trading day seldom ends with the closing bell.

If you shut down your screens at 4 p.m. ET yesterday, you might have felt gloomy after the S&P 500 index (SPX) posted its lowest close since March 30. Weak consumer confidence data from the Conference Board and fresh financial jitters associated with First Republic Bank (NYSE:FRC) (FRC) sent shares of financials, consumer discretionary, and technology stocks to sharply lower settlements.

Then the bell rang, and earnings began hitting the tape, cheering the mood quickly. Microsoft (NASDAQ:MSFT) (MSFT) and Alphabet (NASDAQ:GOOGL) (GOOGL) each jumped in post-market trading after the two mega-caps exceeded Wall Street’s consensus earnings and revenue expectations, and Visa (NYSE:V) (V) and Chipotle (NYSE:CMG) (CMG) also contributed to the positive sentiment with their results. MSFT remains much higher in premarket trading this morning, but GOOGL gave up all its gains overnight.

The MSFT strength is one positive feature this morning, and some other mega-caps also gained overnight despite GOOGL’s retreat. Major indexes have a slightly positive tone, and the Nasdaq 100® (NDX), which includes some of the biggest tech names, was among the gainers. Stepping away from big tech, the rest of the market looked relatively weak early Wednesday as Tuesday’s softness spilled over and Treasuries remained near recent highs, often a sign of “risk-off” sentiment bubbling to the surface.

Watch what the rest of the market does today, not just the mega-caps. Transportation and small-caps were among the 98-pound weaklings yesterday, hit by recession fears after the weak confidence number and soft earnings from United Parcel Service (NYSE:UPS) (UPS). See if they start to get more of a bid. Also worth noting: Volume was lower than average yesterday during the sell-off, perhaps evidence that there wasn’t a huge pile-in of investors eager to exit the market.

• The 10 Year Treasury Yield rose slightly to 3.41% but remains near recent lows.
• The U.S. Dollar Index ($DXY) slid to 101.44.
• The Cboe Volatility Index® (VIX) futures edged up to 19.07 following Tuesday’s sharp rise.
• WTI Crude Oil (/CL) fell to $76.76 despite large U.S. supply draws, its lowest level since the surprise OPEC production cut late last month.

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Takeaways from Alphabet (GOOGL) and Microsoft (MSFT) earnings yesterday afternoon:

• The cloud is down but not out. MSFT’s Azure cloud platform enjoyed quarterly sales growth of 27%, right near the midpoint of analysts’ estimates, and gained a share in the market. It was slower growth than the previous quarter’s 31%, but it wasn’t necessarily a disaster. Much slower growth might have suggested better odds of a recession as companies pulled back spending.
• GOOGL’s cloud sales rose 28% and came in just shy of the average Wall Street estimate, but notably, the company’s cloud business is now profitable—a big step. Still, growth slowed from Q4, possibly a sign of businesses reining in costs.
• The decent showings in the cloud by both MSFT and GOOGL—the second and third biggest players in the space—could bode well for cloud leader Amazon (NASDAQ:AMZN) (AMZN), which reports after the close Thursday. That could be why AMZN shares climbed ahead of the open.
• Digital ad revenue, at least for GOOGL, could also have been worse. Declines here have plagued the company. This quarter, advertising came in slightly above analysts’ forecasts, though still below a year ago. The company called that a sign of “stabilization in ad spend.” Perhaps that’s why shares of digital ad competitor Meta (NASDAQ:META) (META), which reports later today, found some traction in premarket trading.
• Despite the Biden administration’s efforts to make stock buybacks less attractive by slapping them with a new tax, companies keep using the strategy. GOOGL’s announcement Tuesday that it plans to purchase up to $70 billion in shares arguably deserves more credit than the company’s earnings for the stock’s after-hours bounce.

MSFT received numerous analyst upgrades following earnings, as many who cover the stock on Wall Street called the quarter a resilient one. However, bad news came later in the overnight period when U.K.’s Competition and Markets Authority (CMA) said it will block MSFT’s proposed acquisition of video game holding company Activision (ATVI), citing competitive issues. The U.S. Federal Trade Commission has issued an administrative complaint seeking to block the merger. Shares of ATVI fell 10% in premarket trading, but MSFT shares remained up nearly 8%.

Meta (META) puts its best face on this afternoon as it delivers Q1 earnings. Shares lost more than half their value last year before a strong 2023 rally, helped by META’s cost-cutting plans. META’s done two rounds of layoffs over the last six months and plans two more to eliminate a total of 21,000 positions.

When META reports, check for user growth trends across platforms after relatively small gains in Q4. Another area to watch is ads, where impressions rose but average prices fell in Q4. Total costs also increased sharply in Q4 and in 2022 overall, but perhaps the drop in headcount could start to help.

Analysts expect earnings per share of $1.99, down from $2.72 a year ago, and revenue of $27.61 billion, below last year’s $27.91 billion.

Boeing (NYSE:BA) (BA) shares rose this morning despite a worse quarterly loss than Wall Street analysts had anticipated. The company did beat estimates on revenue and stuck by its previous guidance. The jet-maker says demand is strong and it plans to increase 737 production later this year. Supply chain challenges appear to remain an issue.

Banks back under the microscope: Yesterday’s sharp drop in FRC triggered a so-called “flight to safety” as investors jumped quickly into fixed income. The yields on government Treasuries, which move the opposite direction of the underlying note, hit their lowest levels in more than a week.

FRC’s situation is tricky, but not a “contagion” that’s likely to spread, analysts said Tuesday. FRC has been struggling for a while, so news that its deposits fell sharply shouldn’t surprise.

To keep things in perspective, FRC is just one company. Overall, bank earnings this quarter have been a mixed bag, but far from disastrous.

That doesn’t rule out rockiness ahead, and a couple of things to monitor include stock market volatility, which rose yesterday, and the Treasury market. Surges in either or both might indicate investor nerves remain frazzled by the banking sector news and concerns of what might be the next shoe to drop.

As of this morning, the probability of a 25-basis-point rate hike in May stands at around 80%, according to the CME FedWatch Tool, down from nearly 90% yesterday. This could be a sign of participants factoring banking fears into the mix once again. Chances of a follow-up 25-basis-point increase in June fell to just 12%, from nearly 25% at times last week, while there’s a 67% chance of the Fed hiking rates in May and pausing in June, the tool projects.

The market has pretty much baked in that we’ll get an interest rate increase next week—taking the Fed’s target range to between 5% and 5.25%—no matter what happens with banks. Especially considering the Federal Open Market Committee (FOMC) had no druthers about hiking last month right in the middle of a storm shaking the banking sector. However, this morning’s trading suggests far less chance of a follow-up rate increase in June. The FedWatch tool now predicts about a 90% probability that the Fed will lower rates at least once later this year, with highest chances for two cuts by December from current levels.