Here’s looking at you, kid

Stocks had a mixed close yesterday on… mixed earnings. Confidence on the here-and-now is strengthening, the future, not so much, according to The Conference Board’s latest survey.

Look the other way? Sometimes, you just have to roll with it. The day ahead is filled with releases that are likely to cause some up-down-to-and-fro in your portfolio today. We have ADP Employment Change this morning which is considered a prelude to Friday’s “official” monthly employment assessment, though the two rarely agree with each other. Later this afternoon we will get the output of the FOMC’s 2-day policy confab, which is likely to show no change in rates, but the Chaiman’s post-release presser is sure to yield some interesting quote-worthy remarks that will keep the algos, traders, and ultimately financial reporters busy. Regarding those, they are already in motion, and attempting to be on one side or the other with some sort of trade this morning is a fool’s errand. I keep asking folks the same question: “do you think interest rates will be higher or lower at the end of the year; what about next year?” I am sure you have an answer to that question, and that is all you need for now on the topic. In other words, DO look away for the moment.

Regarding corporate earnings results, that is a far trickier topic to conquer. Let’s start at a super high level. United Parcel Service (UPS) did something that it was not proud of yesterday. Already under scrutiny for performance in a world where your drive down your block is likely to find at least 80% of your neighbors’ porches (stoops if you are new yorker) covered in deliveries, the company is struggling to maintain its revenue growth. That is old news, but what is new news is that the company announced that it will lay off 12,000 management employees. My interest in that headline has less to do with UPS and more to do with the economy. There has been an emerging theme in recent earnings announcements. Weak earnings? Lower than expected guidance? CUT COSTS in attempt to appease your detractors. Now, de-bloating if you are losing money is likely the right thing to do, but the theme tells me that more and more companies are struggling to meet Wall Street’s high expectations causing them to cut costs… and we are not just talking about fine-tuning. This can and will have an effect on the larger macro picture at some point and is likely why 45% of blue-chip economists are still expecting a recession. The Fed is a bit more sanguine about recession, but it does expect a decline in GDP growth this year as well as an increase in unemployment. If you agree that the UPS announcement is a sign, then you would agree that we are not quite out of the woods yet. Listen carefully for more macro signs in earnings over the next few weeks. DO NOT look the other way.

Getting closer to ground level with earnings. Using Pfizer as an example, it had a really tough 2023, missing many marks. Yesterday’s earnings release in which it beat EPS targets for Q4 may have appeared to be a sign of reprieve for the beleaguered stock that lost some -35% in the past 12 months. The company attributed its stable results to more than expected orders of Paxlovid and less Government returns of COVID vaccine. I might find that comforting if I and everyone else I know did not just get over COVID a few weeks back. It is clear that a recent wave of the nasty stuff has helped to gussy up the company’s recent numbers… something it cannot always count on. On this, I would NOT look the other way as the company will continue to have challenges as it tries to rely more heavily on its cancer therapeutics and less on its anti-viral portfolio. You see, some stocks move down for the wrong reasons, and some for the right reasons. Unfortunately for Pfizer, it is in the basement for the right reason.

Last night, we got earnings results from Microsoft and Alphabet, two members of the “magnificent seven” I talked about in yesterday’s note. Microsoft knocked the ball out of the park, beating estimates with ease, however the market was unkind to it. Why? Well, a big part of Microsoft’s more recent success has been its adoption of AI in all the right ways. The proliferation of AI in the past 18 months has had a positive impact on ALL Microsoft’s revenue lines. With a +66% return over the past 12 months, investors have really high expectations, so even with a pristine earnings announcement, some investors were disappointed. This may be a DO look the other way moment, as the stock may be down for the wrong reasons. Its distant cousin, the company formerly known as Google, announced that it beat analysts’ estimates in Q4, but strong results in cloud computing and its YouTube unit offset disappointing results in its core business: ad sales. As a result, the stock has been punished in the aftermarket. Should we look the other way or not? Will this weakness in ad sales continue? Wait, a moment, isn’t Alphabet an innovation behemoth? We know that their cloud business is benefiting from hot-topic AI, but what about Alphabet itself? Crickets…crickets…crickets. Is that good or bad? For the moment I would say it is surprising, but it is not likely to persist, and the company is likely poised to release something notable in the future that will put it back on track… at least in the minds of investors. This is a tougher one to handicap, but if you believe that the company will continue to innovate in the future, it is down for the wrong reasons, however if you are unsure and your gut tells you to look the other way, you may want to keep at least one eye on it… to be safe. All this looking this way and that has made my eyes tired, and the opening bell is still hours away. Unfortunately, friend, closing your eyes is not an option… if you want to be successful at investing.

WHAT’S WORTH A LOOK THIS MORNING

Rockwell Automation Inc (ROK) shares are sliding in the premarket, down by -8.53% after it announced sharp misses in EPS and Revenues last quarter. Full year guidance was in line with analysts’ expectations, however. In the past month, 6 analysts have raised their targets while 1 lowered them. Dividend yield: 1.62%. Potential average analyst target upside: +0.8%.

Stryker Corp (SYK) shares are higher by +6.15% in the premarket after the company announced that it beat EPS and Revenues by +5.96% and 3.79% respectively. The company announced full-year guidance that exceeded analysts’ expectations. 64.5% of analysts that cover the company rate it the equivalent of BUY, while 32.3% rate it a HOLD, and the balance of 3.2% give it a SELL rating. Dividend yield: 1.01%. Potential average analyst target upside: +10.2%.

YESTERDAY’S MARKETS

NEXT UP

• ADP Employment Change (Jan) is expected to show +150k new jobs added for the month, slightly lower than the +164k reported in December.
• The FOMC will release its policy decision at 14:00 Wall Street Time. It is largely expected to keep rates unchanged. The Chairman’s press conference will commence at 14:40, which will be the showstopper. Don’t miss this.