Market Insights

Earnings season is normally a big time for the stock market, but these days investors have bigger fish to fry.

Companies including Apple (AAPL), Microsoft (MSFT) and Tesla (TSLA) barely moved after issuing quarterly results. Each beat estimates on both the top and bottom lines, but offered few major surprises. Other companies like American Airlines (AAL), Coca-Cola (KO) and Merck (MRK) rallied briefly on strong numbers but soon faded.

An unprecedented and baffling macro environment is driving the uncertainty. The first issue is the Federal Reserve, which needs to tighten monetary policy from the super-accommodative levels of 2020’s coronavirus pandemic. Interest rates are still near the lowest levels in history despite inflation running at 40-year highs. How quickly will they hike interest rates? How much might inflation moderate on its own, especially as the economy returns to normal? Investors have few guideposts to follow in the process, only increasing their confusion.

Russia’s invasion of Ukraine is the second major issue. It’s worsened inflation by boosting the price of commodities like crude oil, grains and metals. It’s also disrupted supply chains and created the risk of a European recession. The situation could get even worse if Brussels boycotts Russian crude oil, prompting Moscow to retaliate by cutting off natural-gas shipments. But will the worst-case scenario actually play out?

Then you have China’s strict coronavirus lockdowns, which create the risk of more supply-chain problems. But it’s also not clear how long the restrictions will last or how severe they will be.

Investors have responded to these three questions with extreme levels of caution. They’ve essentially “gone on strike” and refused to buy until more clarity emerges. Such paralysis often corresponds to political uncertainties like the 2019 trade war with China or the 2020 Presidential election. “Relief rallies” followed those earlier moments as money comes off the sidelines. Investors may expect a similar reaction if the current uncertainty begins to lift.

Meta’s Big Jump

Meta Platforms (FB) entered earnings season under a cloud of negativity, down more than 50 percent from last year’s high. The parent of Facebook and Instagram did better than feared, with traffic unexpectedly inching higher. Earnings also beat forecasts as the company squeezed more advertising dollars out of users. The stock ripped 18 percent, its biggest one-day gain in almost a decade.

Netflix (NFLX) was just the opposite. It began earnings season 50 percent below last year’s highs, and proceeded to drop another 40 percent after losing more than 200,000 subscribers. CEO Reed Hastings also announced plans to charge users more for sharing passwords.

So why did the two stocks react so differently to their results? One reason is that FB has leeway to boost profits by cutting costs. (CEO Mark Zuckerberg plans to lower spending by 3 percent.) The company also stands to benefit if advertising recovers.

NFLX, on the other hand, may have reached a point of market saturation after years of steady growth. Competition has only increased from services like Disney+. It also has fewer options to boost results — especially because its revenue comes from subscribers rather than advertisers.

Amazon.com Plunges

Like NFLX, Amazon.com (AMZN) was one of the first big Nasdaq stocks to break out two years ago as coronavirus drove remote business. And like NFLX, many of its gains are now reversing as growth slows. Earnings missed estimates as retailing margins collapsed, and revenue guidance for the second quarter was more than 5 percent below consensus. Its up-and-coming advertising business came up short, as well.

One of the company’s main challenges is a higher cost structure after building more warehouses during the pandemic.

International Business Machines (IBM), on the other hand, showed signs of evolving in more of a direction that investors like. The 110-year old tech company reported better-than-expected results for the second straight quarter and has completed the spinoff of its infrastructure unit as Kyndryl (KD). That could let management focus on faster-growing software products like Red Hat. It also helps transform IBM into more of a cloud-computing stock with the potential for multiple expansion.

AMD, Qualcomm

Advanced Micro Devices (AMD) beat consensus estimates last night on the top and bottom lines. CEO Lisa Su said the chipmaker gained further market share in the PC business and continues to benefit from the growth of datacenters and gaming. Qualcomm (QCOM) beat across the board and issued strong guidance. The company, once reliant on smart phones, is increasing exposure to cars and web-connected devices.

Semiconductors have struggled lately amid economic worries and supply-chain issues. However, they’ve been one of the strongest industry groups in recent several years as usage continues to grow. Investors may view them as a “go-to” industry if they believe things are returning to normal.

Mattel (MAT) also stood out this earnings season as merchants restocked items like Barbie and Hot Wheels. It was the second straight quarter that the toymaker beat estimates, helping lift its stock to a five-year high.

One final company that jumped to new highs on results was Paychex (PAYX), which provides payroll and human-resource services to small businesses. PAYX grew during the pandemic by processing employee retention credits under the CARES act, and has now beaten estimates and raised guidance for the third straight quarter.

In conclusion, investors mostly shrugged off the latest quarterly numbers because they remain obsessed with macro risks like the Fed and Ukraine. Some former leaders like NFLX and AMZN had significant drops. But other former laggards like IBM and MAT showed signs of bigger turnarounds.