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Market Insights

High bar for big tech earnings, Fed in command

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Markets are setting a high bar for company earnings. Even the slightest miss (or simply not a big enough beat) has seen some stocks punished.

Microsoft post-earnings was a fascinating example. If you only paid attention to the market in normal trading hours, you’d see this and you’d conclude that all was well:

Microsoft Chart

A casual observer would assume that Microsoft reported earnings after the close, the market reacted positively and gapped higher on the open the next day. All of which was eventually true, but not before a crazy after hours ride:

microsoft nasdaq chart

Microsoft initially plunged on the release, despite a solid set of results:

  • Revenue was $51.7 billion and increased 20% (Beat $50.88 billion expected by analysts/Refinitiv)
  • Diluted earnings per share was $2.48 and increased 22% (Beat $2.31 per share expected by analysts/Refinitiv)
  • Operating income was $22.2 billion and increased 24%
  • Net income was $18.8 billion and increased 21%

What more could you ask for?

Apparently the move was a knee-jerk reaction to the slowing growth in Microsoft’s Azure program. It only grew by 46% vs the last quarter of 48%.That’s the high bar to impress that companies are facing now.

And this was a stock already 15% down from the highs…The earnings call saved the day by guiding to further Azure acceleration in the coming quarters. Markets will be sure to keep a close eye on this metric at the next quarterly earnings release.

What about Tesla?

Despite forecasting that vehicle deliveries would grow by another 50% in 2022, posting record quarterly revenues, beating forecasts, and Musk saying that he "would be shocked if we do not achieve full self-driving, safer-than-human this year," Tesla shares also fell in after hours trade before recovering.

Tesla chart

Musk said supply chain constraints could limit production for the rest of the year:

“Our own factories have been running below capacity for several quarters as supply chain became the main limiting factor, which is likely to continue through 2022,”

The Federal Reserve Will Probably Hike Rates In March

Inflation has to be dealt with. And Fed Chair Powell couldn’t have been clearer when he said:

“Inflation risks are still to the upside in the views of most FOMC participants, and certainly in my view as well. There’s a risk that the high inflation we are seeing will be prolonged. There’s a risk that it will move even higher. So, we don’t think that’s the base case, but, you asked what the risks are, and we have to be in a position with our monetary policy to address all of the plausible outcomes,”

Markets listened. They’re now pricing in a 16% chance of a 50bps hike at the March meeting, and seeing a 25bps hike as nailed on.

target rate probabilities for marc 2022

CME FedWatch

A market that’s increasingly hard to impress, supply chain issues expected to persist, and a Federal Reserve fixated on bringing inflation under control via tighter monetary policy are all strong headwinds for the market to navigate.

Not investment advice. Past performance does not guarantee or predict future performance.

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