An important week in the third-quarter earnings season just concluded, where tech giants such as Microsoft (MSFT), Meta Platforms (META), Google parent Alphabet (GOOG , GOOGL), and Amazon (AMZN) reported their results. Depending on your point of view, the re-emergence of mega-cap Big-Tech dominance in the stock market could be imminent.
However, there are many factors still driving the market and the direction stocks take to close out the year. With all three major averages entering correction territory, it’s not just the mega-caps or tech stocks that are sputtering. And unlike previous quarters, it doesn’t appear as if we can bet on strong earnings as the sole catalyst to push stocks higher. On Friday, the the personal consumption expenditures (PCE) price index — a closely-watched measure of inflation by the Federal Reserve — increased 0.3% for September, as expected.
Notably, consumer spending rose 0.7% in September even as inflation pushed prices higher, better than the 0.5% forecast. Meanwhile, personal income rose 0.3%, which was below the estimates by about one-tenth of a percentage point. The data also showed that the PCE index rose 0.4% when factoring food and energy prices, which tend to be more volatile. This means, on a year-over-year basis, the core PCE grew 3.7% in September: this is the Fed’s main gauge of where prices are headed over the longer term when making its policy decisions.
Although the core PCE is still relatively high at 3.7%, it is significantly below its peak of 5.6% in early 2022. This means the Fed’s efforts over the past year to combat inflation has had an effect, though the core PCE still remains below the Fed’s target of 2%. The headline PCE, meanwhile, was up 3.4% in September which was unchanged from August. Essentially, the data the Fed watches suggests there may be no reason for more rate hikes, but that depends on your point of view, with some taking a more hawkish stance.
Although the rate hikes have shown to have an effect, the fact that consumer spending rose 0.7% in September even as inflation pushed prices higher suggests consumer behavior has not changed drastically enough to warrant a pivot in monetary policy. On Friday, if judging by market movements, investors believe the Fed will continue to raise rates. The Dow Jones Industrial Average was punished, falling 366.71 points, or 1.12%, to end the session at 32,417.59. The S&P 500 declined 19.86 points, or 0.48%, finishing at 4,117.37, while the tech-heavy Nasdaq Composite bucked the trend and added 47.41 points, or 0.38%, to close at 12,643.01.
Friday’s divergence in the three benchmarks suggests investors are still unsure about the direction of the economy and the near-term and long-term impact of monetary policy decisions. But while it’s still early, and more than half of the earnings season still remain, the outlook companies have provided so far suggests stocks can still rebound to close the year. Here are the names I’ll be watching.
Advanced Micro Devices (AMD) - Reports after the close, Tuesday, Oct. 31
Wall Street expects AMD to earn 64 cents per share on revenue of $5.37 billion. This compares to the year-ago quarter when earning were 67 cents per share on $5.62 billion in revenue.
What to watch: There continues to be a noticeable rebound in global PC shipments, according to Gartner, which suggested a recovery in the global PC market could be underway. In the most recent quarter, worldwide PC shipments totaled 59.7 million units, marking an almost 17% decrease year over year. But that decline is showing signs of stabilization, including sequential growth from the previous quarter, noted Gartner analyst Mikako Kitagawa. “The rate of decline in the PC market has slowed, indicating that shipment volumes may have reached their lowest point,” said Kitagawa, adding, “There has been progress in reducing PC inventory after more than a year of issues, supported by a gradual increase in business PC demand. Gartner expects that PC inventory will normalize by the end of 2023, and PC demand will return to growth starting in 2024.”
This bodes well for Advanced Micro Devices, which is one of the key players in the global semiconductor industry. AMD has consistently grown its market share of the global CPU processors, driven by product innovations such as its Ryzen processors built on the Zen microarchitecture. However, margin erosion and the cyclicality in the chip business have been two of the company’s biggest headwinds over the past several quarters. Investors are anxious to see whether margin pressures have bottomed and are now ready for expansion.
Meanwhile, AMD stock, which is up 48% year to date, compared with a 7% rise in the S&P 500 index, assumes these issues are in the rearview mirror. This is because even amid these challenges, the company is demonstrating strong operating leverage, evidenced by its ability to grow profits at a faster rate than its revenue. Assuming the company’s growth metrics rebound in Q3, along with strong guidance, AMD stock will continue to rise despite its recent outperformance.
Moderna (MRNA) - Reports before the open, Thursday, Nov. 2
Wall Street expects Moderna to lose $1.79 per share on revenue of $1.32 billion. This compares to the year-ago quarter when earnings were $2.53 per share on $3.36 billion in revenue.
What to watch: Can Moderna still provide healthy returns? Given that Covid-19 numbers have drastically declined across the globe, the assumption is that Moderna will struggle to grow revenue. Currently down 60% year to date, compared to the 7% rise in the S&P 500 index, Moderna shares have been punished over the past six months, falling 45%, including 12% decline last week. As it stands, their shares have been in a downward spiral, losing a staggering 50% over the past year.
Moderna's management is being tasked to demonstrate that the company can produce and sustain operating profitability and growth beyond its Covid expertise, in which the company said it expects to generate $5 billion in vaccine revenue this year. The market, however, appears to have discounted this forecast, given the weak demand Moderna has seen so far for its boosters shots. But the beyond the Covid vaccine, the company's pipeline is promising; the pipeline, which uses its messenger RNA (mRNA) technology, has several candidates that can come to market to sustain long-term growth, including drug development for influenza and HIV vaccine.
So while the stock price has been under heavy selling pressure, Moderna’s business fundamentals are still intact. The market will nonetheless want to hear what the company has to say on Thursday about its growth expectations for both the near term and long term.
Block (SQ) - Reports after the close, Thursday, Nov. 2
Wall Street expects Block to earn 47 cents per share on revenue of $5.43 billion. This compares to the year-ago quarter when earnings came to 42 cents per share on revenue of $4.49 billion.
What to watch: Shares of Block have been under heavy selling pressure, falling close to 40% over the past six months, including 14% decline in thirty days. It would be an understatement to say that the fintech specialist has felt the recent pullback in the tech sector. But this is a buying opportunity, according to Bank of America analyst Jason Kupferberg. Calling the stock's recent pullback “unjustified,” Kupferberg last week reaffirmed his Buy rating on Block, pointing out that the stock now trades near a historically low valuation at 2.9 times his 2024 enterprise-value-to-EBITDA estimate.
Originally called Square, and known for its peer-to-peer money-transfer service Cash App, the company rebranded its name to Block to present an emphasis on its shift towards blockchain technology. Although Block continues to build out what it envisions as a decentralized finance business using cryptocurrency, its management expects Cash App, which is already used to buy and sell Bitcoin, to lead the new business. For these reasons, the stock was initiated as a Buy at Berenberg Capital Markets. Analyst Mark Palmer calls the stock's pullback represents an attractive entry point. "Management's sharpened focus on controlling the growth of Block's operating expenses has enabled it to demonstrate the significant operating leverage inherent in its business model," said Palmer, adding, ”We believe Block has reached an inflection point regarding its profit power, and it has plenty of runway for increased profitability.” On Thursday investors will want more details on these initiatives to assess where the stock valuation should be.
Apple (AAPL) - Reports after the close, Thursday, Nov. 2
Wall Street expects Apple to earn $1.31 per share on revenue of $84.18 billion. This compares to the year-ago quarter when earnings came to $1.29 per share on revenue of $90.15 billion.
What to watch: Since mid June, Apple shares have not performed as well as investors would have liked. The shares have fallen more than 14% over the past three months, including a 3% decline in the past thirty days. And while the stock is still up respectively by close to 30% year to date, besting the 7% rise in the S&P 500 index, investors are less excited given the stock was up close to 50% year to date at one point, pushing Apple past a $3 trillion valuation.
But despite the bearish tenor of the overall market, the tech giant is doing a solid job navigating through the various headwinds that have impacted its business, namely rising inflation, economic and political woes in China, and a potential recession. As such, there are still tons of reasons to stay bullish on the company’s growth potential. The sales prospects for the new iPhone 15, which was launched in September, is one reason. But it’s not just about the iPhones.
Apple’s Services segment, which generated $21.2 billion in Q3, is up 8.2% year over year and impressively generated $20.9 billion in Q2. Service revenue should continue to generate higher-digit revenue growth this quarter and well into 2024, which will help offset the macro weakness impacting iPhone sales. Notably, its management had already noted that they expect the "September quarter Y/Y revenue performance to be similar to the June quarter, assuming that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter." The market will look for details about the state the iPhone, along with more clues about its long-awaited mixed reality headset, dubbed Vision Pro, which was unveiled at the company's Worldwide Developers Conference.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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