Tech wreck

Stocks slipped yesterday, held back by falling tech shares battered for poor earnings. The housing market continues to slow according to the latest housing numbers from the US Census Bureau.

It’s all relative. As I ply the streets of one of the densest cities in the world, I weave in and out of masses of people, often even bumping shoulders strangers, and I sometimes forget. Maybe it’s a coping mechanism, as I really have very little choice but to brave the densely populated sidewalks of New York City, if I want to get from point A to point B. But sometimes I do remember. Just a few years ago those very streets were empty. What few people braved the streets were double masked, donning thick black sunglasses (though that is the norm for Manhattan), and brightly colored, poorly fitting surgical gloves. I quite literally counted more rats than people one day as I walked with my daughter in Midtown. Now you remember. We were all holed up in our homes. There was very little to do except work, consume, overeat, and break down Amazon boxes.

On consumption, that was a different experience. Hording became a necessity. Buy what you could and as much as you could afford because there was no telling when toilet paper, cleaning products, hand sanitizer, chicken parts, or even garlic would be back in stock. It went far past basic life necessities. With nowhere to go we had to turn to our television sets and streaming services for entertainment. Those needed to be added and upgraded. We worked from home, so computers, software, desk chairs, and even extension cords were purchased fervently. New types of services allowed us to stay connected to fellow workers and clients. I personally struggled to find a webcam for months, ultimately settling for an overpriced, unknown-branded one just so I could attend video chats. Exercise? Also from home, and that required exercise equipment and online services. It was frenzy buying. That surge in consumption was a boon for the companies that had what we wanted… er, needed in 2020 and 2021. That boon played out in the stock market, especially for technology companies which kept the world connected, entertained, and even healthy during the broader pandemic. It seemed that every quarter we expected to hear that the boom ended, but it didn’t. Companies were logging record growth quarter after quarter. It seemed like it would last forever. But it couldn’t.

By late 2021 most of the rats retreated to wherever it was they used to hang out and we returned to the streets, and to work, and to gyms… and to movie theaters. Once-new laptops and extra monitors began to collect dust, along with Peloton bikes and webcams. Dining out, traveling, and… commuting commanded our dollars once again, leaving technology in a lonely state. It was just a matter of time before the markets reflected that shift in consumption. That time is now. Revenue and earnings growth for most of the fastest tech-sector favorites have slowed, and their stock prices reflect that decay in growth. Now, that shift in demand has been somewhat compounded by inflation, but the shifts ultimately reflect consumption patterns returning to… well, normal. Check out this chart of Microsoft’s quarterly revenues for the past 20 years. It grew solidly leading to the pandemic and then shot straight up only to flatten out over the past 2 quarters.

Let’s put some numbers on those lines. The company had revenues of $198 billion in 2022. Compared to its pre-pandemic revenue (2019) of $125 billion, that represents phenomenal growth. This year, analysts expect Microsoft to earn only $216 billion. That is not the same breakneck growth we have come to expect in the past few years. Are you disappointed? Don’t be. The growth that many of our favorite companies experienced during the pandemic was extra-normal… a fancy way for saying not normal. So, if you liked Microsoft before the pandemic, you surely loved it during the pandemic. Now that it has returned to a normal and sustainable growth rate, should you hate it? To be fair, in the case of Microsoft, there are headwinds to be expected in the coming quarters such as currency conversion and lower demand as corporate IT spending is trimmed, but all in all the company is still expected to grow revenues in the coming quarters. Growth aside, those revenues are still far, far greater than they were prior to the pandemic. If you want to be a long-term investor, and I suggest you should, you need to ask yourself questions like, “will Microsoft’s revenue be higher in 5 years, and will its stock be higher than today’s as well?” Questions like that should inform your broader decision process. I won’t give you my answer, because, I suspect you already have yours. There are an estimated 2 million rats in New York City, but don’t worry you are not likely to encounter one if you visit- now that things have returned to normal.

WHILE YOU SLEPT

Caterpillar Inc (CAT) shares are higher by +3.37% after the company announced that it beat EPS and Revenue estimates by +24.31% and +2.10% respectively. The company is viewed as an economic bellwether and its continued success can be viewed as being positive for global economic growth. Dividend yield: 2.43%. Potential average analyst target upside: +8.3%.

Carrier Global Corp (CARR) shares are higher by +2.32% in the premarket after it announced that it beat EPS and Revenue estimates by +2.53% and +0.53% respectively. The company slightly lowered full year guidance but the guidance was still higher than analysts’ estimates. The company, further, announced that its board approved a $2 billion stock buyback program. Dividend yield: 1.61%. Potential average analyst target upside: +19.0%.

Meta Platforms (META) shares are lower by -20.43% in the premarket after the company announced a big EPS miss of -27.82%. The miss was due to decreases in ad spending. The company expects near-term revenue challenges and continued currency headwinds. Potential average analyst target upside: +29.5%.

Keurig Dr Pepper Inc (KDP) shares are lower by -4.54% in the premarket after it announced that it missed EPS and Revenues by -71.14% and -0.19%. The company affirmed its full year guidance. In the past month, 41% of analysts have changed their price targets, 1 up, 6 down, and 10 unchanged. Dividend yield: 2.06%. Potential average analyst target upside: +3.9%.

Also, while you slept: Merck (MRK), Kimko Realty (KIM), Comcast (CMCSA), Ares Management (ARES), McDonald’s (MCD), American Tower (AMT), and American Electric Power (AEP) all beat on EPS and Revenues while CBRE (CBRE), Northrop Grumman (NOC), and Altria (MO) missed the mark.

YESTERDAY’S MARKETS

Stocks fell yesterday as bad earnings from tech pulled shares lower. The S&P500 fell by -0.64%, the Dow Jones Industrial Average gained +0.01%, the Nasdaq Composite Index dropped by -2.04%, and the Russell 2000 Index advanced by +0.46%. Bonds gained and 10-year Treasury notes yields slipped by -9 basis points to 4.0%. Cryptos gained +2.43% and Bitcoin +2.79%.

NEXT UP

• Quarterly GDP Annualized (Q3) is expected to have grown by +2.4% after falling by -0.6% last quarter.
• Durable Goods Orders (Sept) may have gained +0.6% after slipping by 0.2% in the prior period.
• Initial Jobless Claims (October 22) is expected to come in at 220k, slightly higher than last week’s 214k claims.
• Earnings after the bell: Seagen, First Solar, Bio-Rad, Monolithic Power Systems, Deckers Outdoors, Amazon.com, Gilead, ResMed, Vertex Pharmaceuticals, Weyerhaeuser, VICI Properties, Intel, US Steel, and Apple.