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There is at least one "Magnificent 7" stock that isn't looking so magnificent this morning. That would be Meta Platforms (META), which is indicated 15% lower after its fine earnings report was overshadowed by the company's acknowledgment that it will be pursuing a multi-year investment cycle as it shifts many existing resources to focus on AI.
The concern, apparently, is that there will be a lot of spending in the near term and not as much payoff in the near term; therefore, some investors are showing a palpable degree of impatience with the company's plan as they consider the possible opportunity cost of sticking around until the payoff becomes clear.
Some of the outsized weakness, though, is simply a momentum trade cutting the other way, which is to say this winning stock had its share of "renters" and not "owners" as it trended higher in a seemingly endless fashion. At yesterday's close, META was up about 460% from its low in November 2022.
Ironically, that low was reached after the company said it was going to be investing a lot of money in building out the metaverse.
In any case, the fallout in Meta Platforms has been a huge drag on the equity futures market from both a quantitative and qualitative standpoint. Seeing the outsized losses in a widely-owned (and crowded) stock has created some extra angst in front of the earnings reports from Alphabet (GOOG) and Microsoft (MSFT) after today's close.
META isn't the only earnings drag. Dow component IBM (IBM) is down 9.9% after its earnings report and announcement that it will acquire HashiCorp (HCP) for $35.00 per share in cash. Fellow Dow component Caterpillar (CAT) is off 6.5% after coming up shy of the Q1 consensus revenue estimate and forecasting FY24 sales and revenues to be roughly flat from FY23.
Merck (MRK) is taking a different path, as is Honeywell (HON). Merck is up 2.7% in the wake of posting better-than-expected results and raising its FY24 EPS guidance range; meanwhile, Honeywell is up 1.1% after topping expectations.
These companies were headliners in the busiest period of reporting yet that also included results from ServiceNow (NOW), Chipotle Mexican Grill (CMG), Ford (F), Comcast (CMCSA), Southwest Airlines (LUV), Northrop Grumman (NOC), and Lam Research (LRCX).
Clearly, the earnings results in aggregate have not been viewed as a positive catalyst for the market.
The S&P 500 futures are down 63 points and are trading 1.2% below fair value, the Nasdaq 100 futures are down 275 points and are trading 1.5% below fair value, and the Dow Jones Industrial Average futures are down 444 points and are trading 1.2% below fair value.
A barrage of economic data at 8:30 a.m. ET added to the negative bias, mostly because it substantiated the newfound realization that the Fed won't be cutting rates soon.
The Advance Q1 GDP report showed economic output increased at a seasonally adjusted annual rate of 1.6% (Briefing.com consensus 2.4%) versus 3.4% in the fourth quarter, as personal consumption expenditure growth (+2.5%) ended up being weaker than expected. The GDP Price Deflator, on the other hand, did not soften. It was up 3.1% versus 1.6% in the fourth quarter.
The key takeaway from the report is that it conveyed a disappointing combination of weaker growth and higher inflation. Some will be quick to label that "stagflation," but the reality is that the inflation component isn't the number the Fed is looking for to gain confidence that it can cut rates.
Separately, initial jobless claims for the week ending April 20 decreased by 5,000 to 207,000 (Briefing.com consensus 215,000). Continuing jobless claims for the week ending April 13 decreased by 15,000 to 1.781 million.
The key takeaway from this report is that it continues to reflect a labor market where employers, in general, are reluctant to cut jobs, which will be interpreted to mean that they remain generally optimistic about demand. That's not a bad thing, unless one is hoping for a rate cut soon.
The Treasury market seems to have caught the drift that a rate cut isn't happening soon. The 2-yr note yield is up eight basis points to 5.02% and the 10-yr note yield is up seven basis points to 4.72%.
Those higher rates have applied added pressure to a stock market that had enough pressure as it is with the response to Meta's outlook. Alas, it continues to tangle with a toxic mix of items it didn't want to see: fallout in the mega-cap stocks, higher interest rates, fading rate cut expectations, and sticky inflation.
