Microsoft gains while Google misses the mark

Stocks took a glancing blow in a strong selloff yesterday as all the anxieties of the day met. Bond yields have come down in recent days, but they offered no quarter to oversold tech shares.

Nobody knows the trouble I’ve seen. Yes, it’s like that if you are a technology stock or a growth stock…or just one of those volatile stocks that has great potential. Buy the dip and let em’ rip was the battle cry for tech/growth investors for the better part of the past decade. If you just bought shares in all the tech stocks being discussed on CNBC in 2010 and held them, you would have generated significant returns. Even if you are always late to the game and bought those same stocks at their pre-pandemic peaks and rode them through the pandemic, you would still have netted some palpable returns.

It started as a rumbling early last year. People started talking about this obscure connection between bond yields and growth stock prices. As bond yields climb, the current value of growth stocks declines, so goes the theory. I can tell you that the math is certainly there to justify it, but the fact is that there are very few Wall Street analysts that actually base their targets on those calculations. Sure, they go through the process, but they recognize that the market is the ultimate arbiter of a stock’s value. At the end of the day, most analysts use a combination of bottom-up modeling, fundamental multiple analysis, and yes, a bit of discounting (which includes those bond yields). The real key drivers of that combination are, of course, strong fundamentals, but also those multiples based on a stock’s price…WHICH IS DETERMINED BY THE MARKET. Why am I bringing this up now? Well, I am not exactly inviting you to look at the tech stocks in your portfolio, but I am sure that you suspect if not already know that they have had a bit of a tough go lately. Those dip-buying strategies have not quite worked out as fantastically as in the past. Though they have always been a volatile bunch, they have stepped up their volatility quite a bit in recent months with double digit daily percentage moves becoming more common. Remember when stocks went down while bonds went up, and vice versa? That doesn’t seem to work anymore either and that breakdown is acutely clear with growth and tech stocks. In other words, if you own some mega-cap tech favorites and perhaps a few safe bond funds, you have recently been losing on both fronts. If it makes you feel better, you can of course, fall to the thesis that higher bond yields (falling bonds) applied to a stock’s discounted cash flow (DCF) model makes the current value (in this case the stock price) go down. If you are ok with that, stop reading and move to the What’s Shakin’ section…but if you do, you will miss something. Yesterday, 10-year Treasury Note yields fell by -9 basis points. Such a decline in Treasury yields, according to the above theory, should certainly give tech stocks a boost, but as you probably already know, it didn’t quite work out that way with the Nasdaq 100 declining by -3.9%. In fact, since 10-year Notes hit their pandemic-era high of 2.93% last week, yields had pulled back to 2.72% by yesterday’s close, and the tech-heavy Nasdaq which, according to the theory, should have risen, but actually gave up some -8.25%. Wait, is “bonds-up-stocks-down” back? The fact is that there is a tremendous amount of anxiety in the market now with lots of unknowns swirling about. We have China lockdowns, inflation, a mysterious and aggressive looking Fed, a war in Ukraine, and still…COVID. When traders get nervous, they tend to sell their most volatile stocks first…those would be technology, growth…or just those volatile stocks that have great potential. What do they buy with proceeds? Treasuries, of course. Yields there are still not great, but they are more reasonable now, and there is no credit risk. Will this inverse relationship persist? Probably not. But there is one thing that will win out once we get through this risk-on-risk-off volatile stretch. Solid fundamentals. We are in the height of earnings season which enables us to get a closer look at our investments’ health. Many companies are announcing very strong results and providing solid forward guidance, and a good amount of those strong companies are now relatively cheap after declining for most of 2022. Stay focused, think long-term.

WHAT’S SHAKIN’

Alphabet Inc (GOOG) shares are lower by -3.14% in the pre-market after it announced that it missed Sales estimates by -0.9%, with YouTube revenues significantly below estimates. The company attributes the rare miss to Apple’s limiting target ads and Ukraine-war related volatility causing ad spending to ebb slightly. With similar potential challenges, investors will be paying close attention to Meta Inc (FB) which announces after the market closes this afternoon.  Potential average analyst target upside: +32.8%.

Microsoft Corp (MSFT) shares are higher by +4.3% after the company announced that it beat EPS and Revenue estimates by +1.44% and +0.65% respectively. Recent supply chain woes have impacted PC and X-box availability thus dampening growth in those segments, but strong growth in their cloud-based MS Office and their Azure cloud computing offerings displayed strong growth for the quarter. Dividend yield: 0.92%. Potential average analyst target upside: +35.3%.

ALSO, THIS MORNING: Owens Corning (OC), Bunge Ltd (BG), Boston Scientific (BSX), General Dynamics (GD), Humana (HUM), Automatic Data Processing (ADP), American Tower (AMT), Old Dominion Freight (ODFL), Kraft Heinz (KHC), and Fiserv (FISV) all beat on EPS and Revenues while Westinghouse Air Brake (WAB) and Harley-Davidson (HOG) missed on revenues.

YESTERDAY’S MARKETS

Stocks sold off yesterday on a combination of expanding Chinese lockdowns, confusion between Twitter and Tesla, Russia’s threat to shut off LNG supply to Europe, and just plain anxiety. The S&P500 fell by -2.81%, the Dow Jones Industrial Average sold off by -2.38%, the Nasdaq Composite Index dropped by -3.95%, the Russell 2000 Index declined by -3.26%, and the S&P500 ESG Index gave up -3.00%. Bonds gained and 10-year Treasury Note yields lost -9 basis points to 2.72%. Cryptos fell by -5.27% and Bitcoin dropped by -5.13%.

NXT UP

• Pending Home Sales (March) may have fallen by -1.0% after falling by -4.1% in the month prior.
• After the closing bell announcements: Hertz Global, Mattel, Ford, Teledoc, Meta, United Rentals, Align Technologies, LendingClub, Annaly Capital Management, Hologic, American Water Works, QUALCOMM, BioMarin, O’Reilly Automotive, Las Vegas Sands, PayPal, Amgen, and Pinterest.