All Eyes On Digital Giant Earnings

With recession headwinds driving lower valuations and earnings uncertainty in high gear, the level of fear remains high. However, in the past week, NASDAQ was up 5.2%.  So the big question,will these digital giants hold their gains ahead of earnings season?

The MATANA (Microsoft, Apple, Tesla, Alphabet, Nvidia, Amazon) set have seen a big lift lately despite market cuts to valuations. As many astute readers know, the general progression of recession comes down to five major stages:

• Stage 1: Valuation cuts
• Stage 2: Earnings misses
• Stage 3: Credit and liquidity crunches
• Stage 4: Unemployment increases
• Stage 5: Real estate crashes

In general, the big tech set have managed to make their earnings in the past quarter and all indications show that they will likely do so in Q3. However, high interest rates, inflation, strong dollar, and continued global uncertainty cloud this earnings session.  The good news, markets have mainly remained in Stage 1 with a few Stage 2 signals.

SNAP was a good indicator not on big tech, but on the impact of digital advertising and social networks.  Their earnings impact Meta and Twitter more than Google or Amazon, the top ad player and third ranked ad player respectively.  In general, most stocks have not passed into the Stage 2, but this quarter could be telling.

Here's What To Expect For Q3

10/25 Earnings

Google – all eyes on the search ad business as many advertisers have cut spending. Most experts do not expect the growth in cloud to offset drops in advertising, but the growth will help overall earnings.  Unlike Snap, search advertising revenue often fares better in a downturn than social network advertising.

Microsoft – Many gurus expect strong overall Azure cloud business and intelligent cloud business. Most analysts expect Azure to keep slowing.  With PC sales down, that part of the business and Xbox are under pressure to perform. Ad business growth is expected and the continued shift to hybrid work will power much of the momentum for Microsoft.  Investors continue to eye dividend payouts from Microsoft.

10/26 Earnings

Meta – slow user growth and declining ad growth will be the head winds. Snaps’ numbers have investors very worried. The increasing R&D costs to create the metaverse vision will continue to weigh on Meta's earnings amidst layoffs and cost reductions.

10/27 Earnings

Amazon – the digital giant is in a rebuild phase as the core amazon.com business faces losses, The retooling of logistics and warehouses to meet declining demand is in motion.  These actions will help overall profitability going forward. Fortunately, the cloud business via Amazon Web Services is still growing at a 30 to 40% growth rate and will likely maintain momentum.

Apple – While iPhone 14 Plus sales are lower than expected, iPhone 14 Pro and Pro MAX remain strong in sales.  Consumers appear to want high the premium models for their upgrade amidst the upgrade supercylcle of almost 800M iPhones to 5G. Carrier incentives have had a major impact in fueling demand.  Most industry watchers expect the services business to increase growth.

The Bottom Line: Fed Rate Hikes Priced In As Market Has Most Likely Hit Floor

The market optimistically hopes that the digital giants can show that earnings remain strong and that guidance reflects their continued ability to grow.  Any wavering in expectations will send the market back to a 10,700 floor on the NASDAQ.  However, if these big tech names continue to meet earnings targets, the market will have found its floor and the worst will have passed.  The only wild card - future Fed hikes past 100 basis points in November.  This week will set the tone for the rest of the year.