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After kicking off the week green, stocks plummeted on Tuesday, accelerating this month’s sell-off, as market participants weighed a flurry of corporate earnings reports against a backdrop of inflationary pressures, a hawkish Federal Reserve, and the prospect of slowing growth.
The S&P 500 fell almost 3% to cap the session, while the Dow Jones Industrial Average shed 800 points, resuming losses after the index briefly recovered on Monday. The tech-heavy Nasdaq Composite tumbled nearly 4%, logging its third biggest drop of the year and marking its lowest close since December 2020. On the other hand, the benchmark 10-year Treasury yield retreated to hover around 2.7% while the price of crude oil once again topped $100 per barrel.
- S&P 500 (SPY): -2.90%
- Nasdaq (QQQ): -3.77%
- Dow Jones (DIA): -2.38%
- Russell 2000 (IWM): -3.15%
- Volatility Index (VIX): +24.06%
- Alphabet (GOOG): -3.04%, -6.78% after-hours
- Microsoft (MSFT): -3.74%, -1.78% after-hours
- Tesla (TSLA): -12.18%
- NVIDIA (NVDA): -5.60%
- Goldman Sachs (GS): -2.58%
- Visa (V): -4.22%, +4.45% after-hours
- Enphase Energy (ENPH): -2.39%, +5.30% after-hours
- Capital One (COF): -3.10%, -5.66% after-hours
- Robinhood (HOOD): -3.75%, -5.20% after-hours
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Historically, April is usually one of the strongest months for stocks, producing a positive return in the S&P 500 (SPY) in fifteen of the last sixteen years. This month, however, the market is set to close deep in the red, wrought by Russia’s war in Ukraine, the fastest pace of inflation in four decades, renewed lockdowns across China, and a hawkish pivot by the Federal Reserve, which promised to “front-load” interest rate hikes.
Meera Pandit, Global Market Strategist at JP Morgan said, “I do think this is going to continue to be a market where we might have one step forward, two steps back in terms of absorbing some of the headlines that we’re seeing. We are seeing signs that growth is slowing, and there is talk of a recession in the next year or two. “In the short term, it is painful, but in the longer term? It really doesn’t mean much. As long as the economy is basically healthy (which it is) and as long as policymakers are on top of things (which they are), companies will keep growing and making money.”
Over the weekend, China suffered a spike in COVID cases that led the government to re-impose lockdowns and mandatory testing for millions of citizens. Around 25 million people in Shanghai alone, China’s financial center, are locked down on Monday. Under China’s unbending virus controls, anyone found positive — even if they are asymptomatic or have a mild infection — must be isolated from non-infected people.
In a note to clients, Bank of America analyst Helen Qiao slashed her forecast for China’s gross domestic product (GDP) from 4.8% to 4.2%. The note said, “COVID-19 lockdowns and restrictions imposed in Shanghai and neighboring cities are not only hitting local demand but also causing logistic breakdowns and widespread supply-chain disruptions within and outside of the area. In our view, even if such control measures will ultimately be rolled back and economic activities will gradually normalize by mid-year, a heavy toll on growth already seems inevitable.”
In the US, investors are grappling with assertions by the Federal Reserve that the central bank would be taking an aggressive stance against inflation after prices rise by the fastest pace in over forty years. In remarks last week, Fed Chair Jerome Powell signaled a 50 basis point hike to the interest rate was coming next in the next meeting and that officials were committed to “front-loading” more hikes. Next week, May 4, is the next Federal Reserve meeting.
On the other hand, we are currently in the heart of earnings season, with the S&P 500’s most heavily weighted components (MSFT, GOOG, AMZN, AAPL) scheduled to report this.
Google’s parent company Alphabet kicked off earnings for mega-cap tech names, reporting first quarter results that were slightly below analyst estimates. The stock was down roughly -5% after-hours. Here are the numbers:
- Earnings per share (EPS): $24.62 per share, vs. $25.91 expected, according to Refinitiv
- Revenue: $68.01 billion, vs. $68.11 billion expected, according to Refinitiv
- YouTube advertising revenue: $6.87 billion vs. $7.51 billion expected, according to StreetAccount
- Google Cloud revenue: $5.82 billion vs. $5.76 billion expected, according to StreetAccount
- Traffic acquisition costs (TAC): $11.99 billion vs. $11.69 billion expected, according to StreetAccount
Microsoft (MSFT), the second largest company in the US, also reported earnings, though unlike GOOG, the company smashed analyst estimates and climbed over 4% after-hours. Here are the numbers:
- Earnings: $2.22 per share, adjusted, vs. $2.19 as expected by analysts, according to Refinitiv.
- Revenue: $49.36 billion, vs. $49.05 billion as expected by analysts, according to Refinitiv.
- Cloud: $19.05 billion vs $18.9 billion
- Productivity: $15.8 billion versus $15.8 billion expected
- Cloud: $19.05 billion versus $18.9 billion expected
- Personal computing: $14.5 billion versus $14.3 billion
As of Monday, one-fifth of companies in the index have reported results for the first quarter so far, with 79% reflecting an earnings beat for the period – above the five-year average of 77%, according to the latest available data from FactSet. The magnitude of the earnings beat, however, is below the five-year average: 8.1%, compared to 8.9%.
John Butters, senior earnings analyst at FactSet, said “The lower earnings growth rate for Q1 2022 relative to recent quarters can be attributed to both a difficult comparison to unusually high earnings growth in Q1 2021 and continuing macroeconomic headwind.
- In massive news, Elon Musk was successful in his bid to buy Twitter (TWTR) and will take the company private at $54.20 a share or roughly $44 billion.. Incredible!
- Meta Platforms (FB) started its appeal on Monday against Britain’s ruling that it must sell Giphy, arguing the fact that rival Snap offered far less to buy the animated-images provider undermined the rationale used to block the deal.
- Standard & Poor’s reported Tuesday that its S&P CoreLogic Case-Shiller national home price index registered a 19.8% gain during the second month of the year, up from 19.1% in January. The figure marks the third-highest reading since the index was developed in the 1980s.
- Elon Musk’s rocket company SpaceX was due to launch the next long-duration astronaut crew to the International Space Station (ISS) for NASA early on Wednesday,
- Twitter Inc. will be required to pay a termination fee of $1 billion under certain circumstances if it ends an agreement to be acquired by Elon Musk for $44 billion, according to a filing on Tuesday. Musk will also be subjected to the same fee if he ends the deal.
- A Moscow court has ordered the seizure of 500 million roubles ($7 million) worth of Google’s property and funds in Russia, news agencies said, in a lawsuit concerning restrictions the U.S. tech firm has placed on the YouTube channel of a prominent television firm.
- Nio’s advanced manufacturing center in Hefei successfully rolled off the 200,000th mass-produced vehicle on Tuesday, the company said in a statement.
“Life is a long lesson in humility.” -James M. Barrie