How Big Tech Is Getting Away With Such an Earnings Thud

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Roller Coaster

Earnings season is more than halfway gone, with over 70% of the S&P 500 posting their fourth-quarter results. The main takeaway? Quite mixed. And the biggest offenders are in Big Tech. It’s just that you would never get this from the way markets have processed the results. 

The biggest firms in the sector, including the likes of Meta Platforms Inc.Apple Inc.Amazon.com Inc. and Google parent Alphabet Inc., in aggregate missed consensus earnings estimates by 8%, data from Bank of America show. Headwinds remain for the once-hot industry from cyclical to secular, strategists Savita Subramanian and Ohsung Kwon added, especially as the US economy leaves a decade of near-zero interest rates behind. Overall, earnings per share for the S&P 500 companies to report so far have been uninspiring but better than expected, falling 2.8% from a year earlier, rather than the 3.3% drop anticipated, according to Bloomberg Intelligence.

Big Tech’s bad misses constitute a stark reversal from the boom during and immediately after the pandemic, when the sector was one of the few to benefit as people stayed at home. Now, “old economy” stalwarts such as industrials, energy and materials are the ones enjoying better results compared to tech, with capital expenditure remaining strong despite slowing earnings. This is not a brand-new development — as this chart from BofA shows, earnings growth for the tech-heavy Nasdaq-100 has lagged the S&P 500 for five quarters:

What’s confounding is how Mega-Cap Tech continues to outpace broader benchmarks, even after such a lackluster earnings season. Below is the ratio of the NYSE FANG+ Index, an equal-dollar weighted gauge of 10 internet platform companies, and the S&P 500. (The white line represents performance compared to the equal-weighted benchmark, which can be regarded as the “average stock” while the blue line represents the traditional gauge.) Clearly the trend for the FANGs 1 remains upward. 

This has been achieved despite results more disappointing than for most of the rest of the market. A sharp rise in interest rates has also failed to end the rally, even though the orthodoxy for the past couple of years has been that tech valuations improve with lower rates. Perhaps it’s driven by prior positioning, or optimism around Chinese reopening or expectations of a softer landing, BofA strategists said. Despite downward guidance and negative sentiment, mentions of optimism by executives in earnings calls jumped to the highest level since the first quarter of 2021.

Excluding the tech sector, results have been more robust, with top and bottom lines expected to jump 5.6% and 5.9% respectively, Credit Suisse strategists including Manish Bangard and Jonathan Golub said in a note published Tuesday. But strangely, earnings seem to matter less than usual. Companies that beat on both revenues and EPS have been outperforming the market by 1.2% on the first day after their results compared to an average over time of 1.7%, Credit Suisse added, while those that miss on both are underperforming by 1.4% — far below the typical punishment of 3.1%. 

As Bloomberg’s Jess Menton suggests, this may be because the market was braced for a worse profit contraction. Even when companies underperformed, this meant their punishment was dialed back amid general relief. Top-down estimates were so sure that broker analysts had it badly wrong, perhaps, that the misses were not as severe as they looked on the Bloomberg screen: 

Another startling interpretation is that the outlook isn’t all that rosy, and that helps the Big Tech sector. As the last of the pandemic stimulus wanes, corporates are now in belt-tightening mode, Bank of America said. The consumer discretionary sector is likely to end up as the biggest loser from this. FANG stocks tend to have well-protected revenues thanks to their impregnable market position (what Warren Buffett would call a “wide economic moat” and others might call an “unfair anti-competitive advantage”), and they also tend to have more flab to cut. Ergo, despite everything, keep buying the FANGs.

Perhaps the new focus on dealing with a more austere environment explains why Meta’s CEO Mark Zuckerberg was rewarded with a big share price rally after using the word “efficient” or “efficiency” approximately 40 times in his earnings call last week, Bloomberg Opinion’s Parmy Olson . In contrast, he mentioned “metaverse” — the iteration of the internet that he has long envisioned and named his company after — just seven times. At present, with revenues under pressure, the market fears copious evidence that falling sales growth is followed by tighter margins, and doesn’t much care about grand visions of the future. Zuckerberg wisely decided to get ahead of the issue:

He may be right. Big Tech remains bloated despite the well-reported waves of layoffs. Companies may just need to find other ways to cut costs to drive up their margins amid weakening demand. With future margins such an issue, maybe the layoffs so far explain why the market has forgiven the FANGs for such disappointing results. Somehow or other, they were the chief beneficiaries amid speculative excitement two years ago, and now they’re benefiting from a new age of austerity. How long they can they keep this up? 

 Isabelle Lee

Helter Skelter

At first, US stocks liked what they heard when Federal Reserve Chair Jerome Powell spoke with his friend and former colleague David Rubenstein, co-founder of the Carlyle Group, at the Economic Club of Washington around noon Tuesday. Then they decided they didn’t. And then they turned around again. It all added up to anotherof startling cognitive dissonance on the markets.

The S&P 500 and Nasdaq-100 rallied when Powell said that he saw “disinflation” in the goods sector, which would spill over into housing in the second half of the year. For Steve Sosnick, chief strategist at Interactive Brokers, that was exactly the word markets were waiting for:

It was clear that there were algos programmed to buy if he mentioned “disinflation.” When he said the secret word, off we went. But then the longer he spoke, the more we pondered what he was really saying. His tone was even lighter than last week — almost jovial — partly because it’s clear that he and Rubenstein are friends. 

Approaching the middle of the conversation, however, the Fed chair turned from dovish to hawkish, at least in the eyes of Neil Dutta, head of economics at Renaissance Macro Research:

The Fed is not ready to change its fundamental outlook just yet, but he did note that if jobs are strong, they may have to do more than what is priced. This is about the data now.

Powell said the jobs report “shows you why we think this will be a process that takes a significant period of time.” Sosnick called that comment a “mood-killer.” Indeed, by the end of the chat, stocks were negative for the day. And then subsequently they soared:

 mattered as it offered Powell’s first  public comments since Friday’s blowout jobs report stunned Wall Street. By the end, he had added that the process had a long way to go and further hikes would likely be needed if the jobs market remains strong. Here’s the analysis of Bloomberg Economics’ Anna Wong:

The jobs surprise confirmed his message from the post-FOMC presser message that disinflation has barely begun and there’s still a long way to go. It seems clear he hasn’t shifted his views based on that gangbuster report alone.

In short, he said nothing new. The bond market heard the message and allowed yields to rise. After a brief spasm when bonds, like stocks, traded on the assumption that Powell was trying to get across a dovish message, 10-year yields ended the day higher. Overnight index swaps suggested the odds on fed funds rates over the next few meetings had barely budged. Overall, this suggested somewhat greater belief in Fed hawkishness:

How, then, did those same comments help the stock market so much, with the Nasdaq-100 climbing over 2% — now nearly 20% above its recent trough? The dollar moved wildly before ending down for the day, typically a sign of returning risk appetite. In short, assets turned risk-on. Powell’s chat wasn’t the only news, of course — energy stocks led the market thanks to a bounce in crude oil prices. But tech stocks still outperformed. 

Is it possible that the market was fooled by Powell’s relaxed demeanor when talking to an old friend, as opposed to his normal rather guarded posture when taking questions from the press? It depends on whom you ask, but for Win Thin, global head of currency strategy at Brown Brothers Harriman, Powell struck the “right tone” by not taking any bait that may have led Wall Street to conclude he wasn’t hawkish enough. Thin also warned: “Make no mistake, the Fed is ready to go higher for longer.” Risk assets did not respond accordingly.

Markets are always volatile. Plenty of people get paid to keep them active, and in any case there is never any great certainty over where we’re heading. But this is strange. Somehow or other, there is great force behind stocks, and particularly behind those that have been believed by the market to benefit from low interest rates. This persists even after a sharp turn toward higher rates. This comment that one analyst emailed to me captures the issue:

If a lot of smart people are able to make the case for both bull and bear markets and all of us admit to a degree of confusion, then the probability is that there is something very different going on under the surface somewhere – well away from the standard explanations of activity, inflation, rates, liquidity…

Also, it’s too easy to blame algorithms. They can make trading twists and turns more extreme than they need to be, but they were still written by human beings. And given the degree of confusion over the Fed itself, it’s too easy to blame central banks — their mistakes obviously have much to do with how we arrived in this situation, but don’t explain the disconnects in the way the market is handling it. It might be best to accept that we’re in uncharted territory and should sail carefully — even if that’s the last thing some seem to want to do. 

— Reporting by Isabelle Lee

Survival Tips

Never let it be said that this column shies away from competition. So let me direct you to an offer to subscribe to the FT Unhedged newsletter from my friend and former colleague Rob Armstrong, free for 90 days. (After that, you’ll have to get a subscription.) Heterodoxy and a free marketplace for ideas is good for all of us, as is competition. Up to a point. Two years ago, when Unhedged launched, I urged everyone to subscribe in this space, and added: “And henceforward I will enjoy channeling my inner Jeff Bezos and remorselessly crunching FT Unhedged underfoot like a bug. I love competition, but there are limits.” I’m not surprised, and indeed very glad, that FT Unhedged is still going strong — but it’s nice to see it is at least resorting to price cuts. Give it a try. And if you have any other newsletters to recommend to Points of Return readers, (other than Matt Levine’s, which I assume you already subscribe to, and if not, why not?), do let me know.

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— With assistance by Isabelle Lee

1. Historically before name changes, Facebook, Amazon (and later Apple), Netflix and Google.

To contact the author of this story:

John Authers[email protected]

To contact the editor responsible for this story:

Patrick McDowell[email protected]