If there were any doubt that the Federal Reserve is done with its rate-hiking cycle and is now ready to cut rates, those doubts were put to rest on Friday. An important inflation gauge released Friday affirmed much of the data we have received, highlighting that the rate of price increases slowed down as 2023 came to a close: The personal consumption expenditures price index (excluding food and energy), an important gauge for the Federal Reserve, rose just 0.2% in December and was up 2.9% year over year, according to date released from the Commerce Department.
Economists had been looking for increases of 0.2% and 3%, respectively, according to a Dow Jones survey. Just as important, on a monthly basis, core inflation rose from 0.1% in November, while the annual rate declined from 3.2%. As it now stands, the 12-month rate is the lowest it has been in almost three years, dating back to March 2021. To be sure, the 3.2% inflation rate means that the metric is still not back to the Fed’s targeted rate of 2%. At the same time, the Central Bank has done a remarkable job battling inflation which was north of 9% at its peak of two years ago. The new data has likely affirmed the market’s expectation for rate cut at some point in the first quarter, with more to follow later in the year.
In that vein, evidenced by the mixed results in Friday’s trading, it appears investors are still deciding when the new rate cut will be. On Friday, the Dow Jones Industrial Average rose 60.30 points, or 0.16%, to close at 38,109.43. This is despite a downdraft in shares of Intel (INTC), which fell 12% after issuing downbeat guidance. Intel’s decline was offset by gains in American Express (AXP) with the credit card issuer's stock hitting a record high after stronger-than-expected guidance and a boost in its dividend.
The S&P 500 lost 3.19 points or 0.07% to close at 4,890.97. Despite a strong performance by Netflix (NFLX) which gained 17.5% on stronger-than-expected earnings and subscriber gains, the Technology sector struggled on Friday, sending the tech-heavy Nasdaq Composite lower 55.13 points, 0.36%, to close at 15,455.36. However, for the week, the Nasdaq ended 1.36% higher, while the Dow closed up 0.81%, and the S&P 500 added gains of 1.28%.
In terms of the Fed's decisions regarding interest rates, a cut may be likely at next policy meeting in March, which is still some two months away. For this, the Fed Funds futures market is pricing in about a 70% probability that this will happen, according to the CME Group’s FedWatch tracker. In the near term, Q4 earnings from heavyweight tech hitters will determine how strong the market rally remains. Five titans of the Magnificent Seven will be the names to watch this week.
Alphabet (GOOG , GOOGL) - Reports after the close, Tuesday, Jan. 30
Wall Street expects Alphabet to earn $1.59 per share on revenue of $85.28 billion. This compares to the year-ago quarter when earnings came to $1.05 per share on revenue of $76.05 billion.
What to watch: The stabilization of its advertising segment combined with favorable AI trends have boosted Alphabet’s growth prospects. Investors are expecting this to be the case, among other growth developments evidenced the stock’s strong run over the past thirty days. After gaining 60% over the past year, shares of the Google and YouTube parent have risen 9% year to date, besting the 2.7% rise in the S&P 500 index. The stock has risen close to 25% over the past six months, driven by, among other things, a revival in digital advertising. But Google’s recently launched Gemini, its latest large language model, has gotten investors really excited.
The generative AI market is currently growing at 42% and could hit $1.3 trillion by 2032, according to Bloomberg Intelligence estimates. The bulk of the revenue growth from generative AI, estimated $247 billion by 2032, will come from demand for the infrastructure needed to train AI models. What's more, estimates suggests that the AI-assisted digital ads business could reach $192 billion in annual revenue by 2032, while revenue from AI servers could hit $134 billion. Google plans to license Gemini to its customers through the Google Cloud platform so customers can leverage them in their own applications. Gemini will also power Google’s ad products, the Chrome browser, and other Google assets, all over the world. In essence Gemini is the future of Google. On Tuesday, investors will look for the company to provide clearer details about Gemini’s money-making capabilities.
Microsoft (MSFT) - Reports after the close, Tuesday, Jan. 30
Wall Street expects Microsoft to earn $2.78 per share on revenue of $61.1 billion. This compares to the year-ago quarter when earnings were $2.32 per share on $52.75 billion in revenue.
What to watch: Shares of Microsoft have gone on an impressive run over the past year, surging some 70%, more than tripling the 22% rise in the S&P 500 index during that span. This includes more than 15% gains in six months, which has doubled the 7% rise in the S&P 500 index. The software giant has been in a see-saw battle with Apple (AAPL) for title as the world's most-valuable company. The battle may create some separation once the company’s earnings are released. Investors have fallen in love with Microsoft for many reasons, namely, the company's advances in generative artificial intelligence, as well as the billions it has spent as part of its investment in OpenAI’s ChatGPT.
Microsoft has begun to monetize AI, and has since launched Copilot, which leverages AI to enhance its productivity software suite. Copilot is already used by 40% of Fortune 100 companies, and over 37,000 organizations have subscribed to Copilot for Business. Microsoft 365 Copilot is priced at $30 per month, with some analysts estimating that at $30 per user per month, Copilot could boost Microsoft’s fiscal 2025 revenue by as much as $9 billion. These bullish estimates may have some credence, particularly on the heels of the company’s Q1 2024 earnings results, which showed better-than-expected growth at its Azure cloud unit. Q1 revenues beat consensus expectations by a significant margin, coming in at $56.5 billion. Not only was that ahead of consensus by 4%, it translates to a 13% growth year over year. As such, Microsoft stock remains one to own in 2024. On Tuesday, the company’s guidance will gauge how confident the management feels about its long-term growth potential.
Amazon (AMZN) - Reports after the close, Thursday, Feb. 1
Wall Street expects Amazon to earn 80 cents per share on revenue of $166.15 billion. This compares to the year-ago when earnings were 3 cents per share on revenue of $149.2 billion.
What to watch: With a gain 22% in six months and 63% over the past year, besting the 21% rise in the S&P 500 index, Amazon stock has been one of the strongest performers in the Magnificent Seven. The e-commerce giant's growth and efficiency strategies have paid off handsomely. Spanning the last four quarters, Amazon has not only delivered an increase of 565 basis points in its EBITDA margin, the company’s net profit margin has increased by 672 basis points. In the most recent quarter, Amazon showed signs that its cost-cutting initiatives are working as profits have significantly improved across various segments save for AWS which suffered a slight dip amid rising expenses.
In terms of overall execution, the management continues to push all of the right buttons. In the most recent quarter, Amazon revenue of $143.1 billion rose 11% year over year, while operating income saw a staggering year over year increase of 343%. The company’s efforts to diversify revenue streams is taking share, with Q3 third-party merchant revenue growing 20%. Just as impressive, non-goods services, including subscription services, AWS, and advertising, generated Q3 revenue of $46.5 billion, growing 16% year over year. And with Q3 revenue of $23.1 billion, AWS maintained its high operating margin at 30.3%. All told, Amazon now has slimmer cost profile which will lend to faster earnings growth in the quarters ahead. From a valuation perspective, while Amazon stock is not as cheap as it were six months ago, the shares still looks like a bargain relative to the company’s long-term potential. On Thursday beyond a top- and bottom line beat, investors will want strong profit guidance to support the long-term return investment thesis.
Apple (AAPL) - Reports after the close, Thursday, Feb. 1
Wall Street expects Apple to earn $2.10 per share on revenue of $118.26 billion. This compares to the year-ago quarter when earnings came to $1.88 per share on revenue of $117.15 billion.
What to watch: Despite ending 2023 on a strong note, Apple shares have not performed as well as investors would have liked over the past six months. During that span, the stock has traded flat, while the S&P 500 index has risen more than 7%. But as we look into the rest of the year, there are plenty of reason to be bullish about Apple’s growth prospects, including the company’s anticipated launch of the Vision Pro augmented reality glasses. The sales prospects for the new iPhone 15 which was launched in September, is another reason. The company recently regained its leadership in smartphone shipments, further expanding its installed base. But it’s not just about the iPhones.
Apple’s Services segment which generated $22.3 billion in Q4, rose 16% year over year and has gown impressively from $20.9 billion in Q2. Service revenue should continue to generate high double-digit revenue growth this quarter and well into 2024, which will help offset the macro weakness impacting iPhone sales. Meanwhile, Apple continues to enjoy a stable stream of recurring revenues, providing a foundation for sustained top-line growth. The company is deploying capital to shareholders via its extensive share buyback program. The buyback program which educes the shares outstanding by roughly 3% annually, will help drive higher EPS growth. So, combined with the the company’s momentum in services, efforts towards operational efficiency gains, and strategic capital allocation, there are tons of reason to love Apple stock. The market will look for further details in the areas to assess an appropriate valuation for the stock.
Meta Platforms (META) - Reports after the close, Thursday, Feb. 1
Wall Street expects the Facebook parent to earn $4.93 per share on revenue of $39.08 billion. This compares to the year-ago quarter when earnings were $1.76 per share on revenue of $32.16 billion.
What to watch: Riding the recent gain in mega-cap tech stocks, shares of Meta Platforms earlier this week topped the $1 trillion market cap. After skyrocketing more than 170% over the past year, the Facebook, Instagram and WhatsApp parent company has already enjoyed year-to-date stock gains of more than 11%, besting the 2% rise in the S&P 500 index. Investors are seemingly all in on the Meta. The management has pushed all of the right buttons, including various cost optimization initiatives. Many of which have enabled Meta to lower its 2023 expense guidance on two occasions this year. These initiatives not only puts the company in a much stronger financial standing in the near term, it is poised to improve in the long term as cost efficiencies are further realized.
Investors want to know how much better things can get. The stock is still cheap, according to Citigroup analyst Ronald Josey who earlier this week reiterated his Buy rating on the stock and raised his target price to $440 from $425. "Meta remains our top pick across the Internet sector for 2024 as engagement continues to expand as the company benefits from a multi-year product roadmap across Social, GenAI, and Ads innovations as margins expand," Josey wrote in the note to investors. Josey is not alone in his bullishness. Citing the monetization potential of WhatsApp combined with artificial intelligence to automate customer service, analysts at Mizuho, while maintaining a Buy rating on Meta, believe Meta's revenue base could rise incrementally by a third over time. As such, the company must continue to show gradual improvements in these areas, while demonstrating its prominence among big tech for the quarter and full year.
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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