As a rule, I try not to write self-aggrandizing pieces that basically say “I told you so!” However, after the high profile earnings we have seen after the close yesterday and again before the opening this morning, I can’t resist pointing out that the reality supported something I said. On October 16, just as earnings season was getting underway, I wrote this piece that warned investors not to read too much into the results of any one company, and what we have seen so far illustrates why.
As illogical as it is in some ways, human beings naturally want to draw broad conclusions from individual data points. We want to impose some kind of order on the world and make the unpredictable predictable because our minds have trouble processing ideas like randomness and chaos. But even in our interconnected world, information doesn’t always have significance for the broader picture. That was ably demonstrated yesterday afternoon by the disparity in results between two tech giants, Microsoft (MSFT) and Google parent company Alphabet (GOOG, GOOGL).
Microsoft crushed it. They reported EPS of $2.99, beating the consensus estimate for $2.65, with the outperformance coming mainly from their cloud computing business. That seems to be largely down to the benefit they derive from OpenAI, the maker of Chat GPT, and it raised hopes that growth in that department has now bottomed out after falling for a while. It should be said that the “drop off” is growth is from 45% or so to around 25%, which is still respectable growth for a business unit of any kind. Still, a reversal of that trend is what investors wanted to see, and MSFT delivered.
If you look at just Microsoft’s earnings and extrapolate what they mean for the economy, the obvious conclusion is that America’s businesses -- the world’s, even -- are doing just fine. Having cut back in expectation of tough times, they are spending on new technology again, so presumably either they are making more than they anticipated or their outlook has improved, right? Well, as Lee Corso would say, not so fast, my friend.
Alphabet also reported for calendar Q3, and the story behind their earnings sent exactly the opposite message. They also beat on the top and bottom lines, but the stock is trading lower this morning due to a miss in a crucial area: cloud computing. Investors looking for clues as to the state of the wider economy will therefore be asking themselves a question this morning: which earnings report is more indicative of the broader economy? Are businesses spending more on technology or not?
The problem is that these two sets of results don’t answer that question at all. All they tell us is that, in a competitive market, Microsoft did better than Alphabet. One could argue that GOOG’s positive surprise despite that is a good sign, but again, that is largely about a competitive advantage. AI or not, Google is still beating the pants off Bing. All of that is good for one and not so good for the other, but it means nothing beyond that.
Similarly, while I have in the past said that Visa's (V) results are a good indicator of the health of the world’s consumers given how they represent the overall level of consumer spending, it would be wrong right now to read too much into the beat that they reported yesterday. They said it was driven by travel and leisure, which is definitely a good sign, but that means nothing if rival Mastercard (MA), who report tomorrow, don’t report the same thing.
Over the last year or so, as the Fed has squeezed liquidity and hiked rates, the U.S. economy has slowed. That has put pressure on corporations to cut costs and compete better, and MSFT and GOOG’s earnings make it clear that some have done that better in some areas than others. That, not any indication of overall economic strength or weakness, is what investors should remain focused on as this earnings season continues.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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