This week, Gabrielle Reilly, CFP®, GFP (USA), MSBA, addresses the stock market volatility currently grabbing headlines before sharing earnings reports from big names Microsoft, Google (Alphabet), and Facebook (Meta).

Transcript

Welcome to the Weekly Market Update.  Well, this was the biggest week for the earnings season in terms of the number of companies reporting results, and we won’t have time to get to all of your companies, but I do want to touch on three of the largest and most important stocks: Microsoft, Google and Facebook. 

Before turning to earnings, we have to address the fireworks in the stock market which are once again grabbing the headlines. Although the market has been dropping for some time, we have not yet seen the kind of capitulation that would signal that an end to the carnage is nearing, perhaps until now. If you are feeling nervous about the stock market, that is both natural and a good sign. At the conclusion of their meeting on Wednesday, Fed Chairman Jay Powell announced that they would be raising short-term interest rates by 50 basis points as expected, that they would also most likely raise rates 50 basis points at the next two meetings, and aren’t considering a 75 basis point increase at this time. The Fed has never been this explicit before, which should make investors happy by reducing uncertainty, and indeed stock prices took off after the press conference with the market up some 3% by the end of the day. On Thursday, stock prices sank, perhaps due to a weak labor productivity number stoking fears of inflation. But it looked more like forced selling due to margin calls at highly leveraged funds since the most liquid stocks were down as much or more than others.  This level of daily volatility is extremely unpleasant while we go through it, but we will emerge on the other side, especially on the backs of great companies.     

Microsoft revenues and profit rose last quarter as demand for its cloud services and software continued to climb with the shift to remote work triggered by the pandemic. For the quarter through March, the company said its revenues rose 18% from a year earlier to over $49 billion as its net income rose 8% to almost $17 billion. Through the pandemic, Microsoft and other business software companies experienced  booming stock prices and sales as organizations around the world used more digital tools to help with remote working. This bolstered demand for Microsoft Office applications as well as its cloud infrastructure services.  Microsoft remains the second largest cloud infrastructure vendor behind Amazon, but the company has been gaining market share by using its leadership in office applications as leverage to grab big deals for its Azure cloud, which saw revenue rise 46% year over year. It had nearly 20% of the market in 2020, well behind Amazon Web Services at 40%, but up from 7% in 2016.   

Microsoft returned $12.4 billion to shareholders in buybacks and dividends, up 20% year over year. 

Google parent Alphabet posted slower sales growth as global economic turmoil disrupted digital advertising spending, which has already been easing after pandemic highs. The company said first quarter sales rose 23% from a year ago, the lowest rate for the tech giant since late 2020.  

The company at that time saw a period of massive sales growth, as small and large businesses alike flooded into the ad market seeking to win customers who spent the early period of the pandemic sequestered in their homes.  

Company sales advanced 41% last year. Rising inflation, supply chain disruption, Russia’s war in Ukraine and other factors have weighed on the economic outlook and companies’ appetite to spend on ads. Alphabet reported $68 billion in sales for the first three months and net income dropped 8.3% to $16.4 billion, below the consensus estimate.  

Alphabet reported strong top line growth in its cloud computing business, where it is trying to catch up to Amazon and Microsoft.  

The cloud business remains a heavy investment area for the company, and Google Cloud Services remains unprofitable. 

Facebook parent Meta Platforms added more users than expected but posted its lowest revenue growth since going public a decade ago, as the company navigates growing competition and privacy headwinds for its advertising business. The user numbers were a surprise for the tech giant.  

In the wake of poor earnings results from other digital ad rivals earlier this week, investors had feared the worst. And on Wednesday they pushed Meta shares up more than 18% after the results were announced.  

Meta’s stock price was battered in February when the company posted quarterly results that showed a sharper than expected decline in profit, a gloomy revenue outlook and a dip in its daily active users.  Meta’s advertising revenue for the first quarter was $28 billion, up 7% from a year ago. The revenue growth marked the slowest pace since the company went public in 2012, signaling the impact that add tracking changes introduced by Apple last year have had on the advertising business.  

Meta had warned that those changes would cost some $10 billion in 2022. Meta also reported net income of $7.5 billion and a user base of nearly three billion daily active users. 

So, what does it all mean?   

There are still many scary headlines with record high inflation and the war in Ukraine.  

The government even reported that the economy shrank 1.4% in the first quarter as exports fell.  

But consumer spending held up and the U.S. economy is still expected to grow around 3% in 2022. The biggest headwind for the stock market has been the debate about how fast the Federal Reserve will and should raise interest rates as it battles inflation.  

In the meantime, you own a portfolio of great companies that continue to find ways to grow earnings. We didn’t even get a chance to touch on the many which posted stellar results such as PepsiCo and Merck. But we are following them closely on your behalf.  

So please, sit back, relax, have a great weekend, and join us next time for the Weekly Market Update. 

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