Tech Sector Has Lots to Prove as Earnings Loom Following Strong Q1 Stock Market

Just In

Coca-Cola (NYSE:) shares sweetened slightly in premarket trading after the soft drink and food giant reported Q1 earnings and revenue that surpassed analysts’ estimates. Higher average selling prices helped provide a tailwind, but the company also moved more product by volume than it did a year earlier. KO expects 4% to 5% earnings growth in 2023. PepsiCo (NASDAQ:) reports later this week for another look at the soft drink market.

The data calendar is blank today, and earnings are relatively light. That changes in a big way starting tomorrow.

Stocks in Spotlight

Microsoft (MSFT), Alphabet (GOOGL), and Amazon (AMZN) are among the big sluggers in this week’s earnings lineup. Social media is also in the pack as Meta (META) will post Wednesday. Intel (NASDAQ:) and Texas Instruments (NASDAQ:) represent the semiconductors. Watch to see if INTC provides an update on efforts to reshore chip production from Asia back to the United States.

It could be a tough outing for info tech if analysts are right. Average earnings per share for the sector could fall 15.1%, according to the latest estimate from research firm FactSet. Factors pressuring companies include the strong dollar, sluggish demand for semiconductor chips, businesses cutting back on cloud computing, and waning personal computer sales. The thing to watch for isn’t so much the bad news that we know already, but whether companies in their outlooks hint that there’s hope on the horizon.

One phrase to listen for is “digital ad spend,” which is a huge earnings driver for companies like GOOGL, META, and Roku (NASDAQ:). If that starts to decline, it makes guidance from these companies extremely important. Remember, tech led the market higher in Q1, so the bar is set high for these companies’ earnings, just as it was set low for financials earnings. Meeting earnings expectations might not be enough to get investors more enthused about the tech sector.

Cloud is another key area to watch as GOOGL, MSFT, and AMZN report.

First up: MSFT leads off tomorrow after the close. One issue going into FY Q3 earnings for the software and cloud giant is what appears to be slowing growth in cloud. Last quarter, MSFT guided for its “intelligent” cloud revenue—including Microsoft Azure—to grow 17% to 19%. That compares with 26% growth a year ago.

Analysts expect EPS of $2.23 and revenue of $51.02 billion when MSFT reports.

Alphabet: The other behemoth reporting tomorrow afternoon is internet search giant Alphabet (GOOGL). GOOGL approaches earnings with shares about in line with overall sector performance so far this year but down dramatically from year-ago levels.

Ad spending in the tech and media sectors slowed dramatically in 2022, and that showed up in GOOGL’s Q4 earnings results. Advertising revenue fell more than $2 billion in Q4 from a year earlier, with drops in major platforms including Search and YouTube. In January, GOOGL laid off 12,000 employees.

Analysts expect EPS of $1.07 and revenue of $68.85 billion when GOOGL reports.

Other key companies reporting this week include McDonald’s (MCD), United Parcel Services (UPS), and Caterpillar (NYSE:), among many others.

Eye on the Fed

The probability of a 25-basis-point increase next month was 90% this morning, according to the CME FedWatch Tool. After that, the tool prices in a 68% chance of the Fed raising in May and pausing in June, and about a 25% chance that the Fed will raise rates 25 basis points at both meetings.

We’re now in the Fed’s “quiet period,” meaning investors can likely focus fully on the flood of earnings news this week without any extracurricular headlines from Fed speakers. By now it’s fair to say most investors grasp the Fed’s views pretty clearly following all the hawkish talk of the last few weeks. The inflation fight isn’t over.

What to Watch

Beyond a host of earnings reports, the week ahead also provides critical inflation and U.S. economic growth data, though we’ll have to wait until Thursday and Friday. That’s when Q1 Gross Domestic Product and Personal Consumption Expenditures (PCE) are due, respectively.

Early analyst consensus for Q1 GDP growth is 2%, according to Briefing.com. That’s down from 2.6% in Q4.

March PCE and core PCE prices, according to Wall Street’s consensus, are expected to rise 0.1% and 0.3%, respectively, compared with 0.3% for both in February.

Overseas, get ready later this week for the Bank of Japan’s (BoJ) monetary policy decision and preliminary estimates on Euro-area growth.

CHART OF THE DAY: REVISITING 2021. After a year of elevated lows, the CBOE Market Volatility Index (VIX–candlesticks) appears to be heading to pre-2022 levels. The VIX, also known as a the “fear index,” seems to suggest that investors are becoming increasingly more bullish despite recession talk. This could be a good sign for stocks. However, contrarian investors often see the move lower on the VIX as a sign of investor complacency that often precedes a reversal. Many contrarians go by the mantra “If the VIX is high, it’s time to buy; if the VIX is low, look out below.” One problem with this mantra is when these levels shift. Last year, the low was around the 20 level. In 2022, the low was around 15. If you go back to 2019, the low was around 12. Data source: Cboe. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

VC, PE vacuum ahead? If you think the recent shudder through the markets shook only stock and bond investors, Fortune says guess again. The publication, citing CB Insights data, reports that global venture capital funding hit a three-year low in Q1 to reach their lowest levels since before the pandemic. Private equity had a sturdier quarter, according to PitchBook data, with deal count down 9.3% but deal value up 11.4% as investors closed March expecting rate hikes to slow. However, Fortune notes that private equity deal exits continue to fall as firms are “hesitant to sell companies at low valuations.” PitchBook analyst Tim Clarke adds that PE “has to find a third avenue for creating liquidity,” such as taking firms public or selling out to larger firms. Stay tuned.

Tough row to hoe: Tractors are rolling across much of the U.S. Midwest as farmers ramp up spring planting of corn and soybeans, the two most widely grown and highest-value cash crops (worth a combined $153 billion in 2022). Farmers in Iowa, Illinois, and other top agricultural states are expected to seed a combined 179.5 million acres to corn and soybeans this year, based on an Agriculture Department forecast, up 2% from 2022 and more than enough to cover the entirety of Texas. Drought and other adverse weather in parts of the Midwest curbed harvests in recent years, making it particularly important farmers avoid crop shortfalls this year because high grain and meat prices have contributed to soaring inflation (food CPI in March was up 8.5% from the same month in 2022, according to the Labor Department). The war in Ukraine, which like the U.S. is a top global grain exporter, has further disrupted grain supplies.

Corn and companies: With the U.S. summer growing season ahead, it’s worth keeping an eye on futures prices for corn and soybeans, which are down from multi-year highs in 2022 but remain historically high. Publicly traded companies in the agricultural sector also have a lot at stake, including grain processors and food makers like Archer Daniels Midland (NYSE:), Bunge Ltd (NYSE:), Conagra Brands (NYSE:), and farm equipment manufacturers, such as Deere & Co. (NYSE:). In fact, ADM is expected to report earnings tomorrow, a chance for investors with interest in the food sector to get an update on planting season, food inflation, and other issues affecting the industry

Calendar

April 25: April Consumer Confidence, March New Home Sales, and expected earnings from 3M (MMM), Dow Chemical (DOW), General Motors (NYSE:), Alphabet (GOOGL), Microsoft (MSFT), Halliburton (NYSE:), McDonald’s (MCD), PepsiCo (PEP), Raytheon (NYSE:) (RTX) United Parcel Service (NYSE:), and Verizon (NYSE:).

April 26: March Durable Orders, and expected earnings from Boeing (NYSE:), Meta (META), Boston Scientific (NYSE:), Humana (NYSE:), and Norfolk Southern (NYSE:).

April 27: Q1 Gross Domestic Product (first estimate), March Pending Home Sales, and expected earnings from Amazon (AMZN), AbbVie (NYSE:), Altria (NYSE:), Baxter (NYSE:), Bristol-Myers Squibb (NYSE:), Caterpillar (CAT), Eli Lilly (NYSE:), Honeywell (NASDAQ:), Mastercard (NYSE:), and Newmont (NEM).

April 28: April Chicago PMI, March PCE Prices, March Personal Income, April University of Michigan Consumer Sentiment-Final, and expected earnings from Aon (NYSE:), Chevron (NYSE:), and Exxon Mobil (NYSE:).

May 1: March Construction Spending, April IMS Manufacturing Index, and expected earnings from CNA Financial (CAN)

Happy trading,

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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