Big Tech, Big Disappointment

It was all about Big Tech earnings this week, with Microsoft, Alphabet, Meta, Apple, and Amazon all providing updates. But whether it was their performance last quarter or their near-term outlooks, virtually all of them disappointed investors in one way or another, undermining bets that this year’s stock market selloff was over. On the macro front, the European Central Bank (ECB) delivered another jumbo rate hike and new data showed the US economy grew more than expected last quarter. Finally, global inventories of copper have slumped this year to alarmingly low levels. Find out what that means in this week’s review.

Macro

The ECB delivered a second straight 75 basis point hike on Thursday, effectively doubling its key interest rate to 1.50% – the highest level in more than a decade. In a statement, the ECB said that inflation remains far too high and will stay above target for an extended period, and that it expects to continue raising interest rates as a result. While those higher interest rates are necessary, they come at a time of faltering economic growth in the continent. While the eurozone economy is expected to have grown 0.7% in the third quarter, many economists expect it to shrink for the next three quarters due to the impact of high energy and food prices on consumer spending and industrial output.

New data out that same day showed the US economy rebounded following two quarterly contractions. US GDP increased by a better-than-expected 0.6% last quarter from the one before, representing an annualized pace of 2.6%. The issue is, the growth came in large part due to a narrowing trade deficit, as fading consumer demand lowered imports while exports rose. That’s a one-off occurrence that likely won’t be repeated in future quarters. Consumer spending (the economy’s main engine), meanwhile, advanced just 1.4% – far slower than the previous quarter, in a sign that the economy is beginning to slow.

Stocks

It was all about Big Tech earnings this week, so here’s a summary of each one of them.

Microsoft's revenue grew 11% last quarter from a year ago. While that topped analysts’ forecasts, it was Microsoft's weakest quarterly sales growth in five years, held back by the surging dollar, slumping PC demand, and a slowing digital ad market. Revenue growth at the firm’s closely watched Azure cloud-computing business decelerated to 35% while higher energy costs ate into the segment’s profit margins. Excluding the impact of the rising dollar, Azure’s sales rose 42%, suggesting global demand for cloud services is still holding up even as firms cut back some other corporate spending in the face of slowing economic growth. Microsoft said it expects Azure’s revenue growth to drop by 5 percentage points in the current quarter compared to the prior one. Hard-to-please investors didn’t like the sound of that: they sent Microsoft’s shares 7% after the news.

Google-parent Alphabet didn’t fare as well, posting revenue and profit that both came in below expectations, sending the firm’s shares 6% lower. Revenue at its all-important ad business – which spans across YouTube and Google and makes up the bulk of its revenue – grew a measly 2.5% last quarter from a year ago. Soaring inflation and falling economic growth are denting the digital ad market, leaving Google and competitors like Facebook and Snapchat fighting for smaller budgets. Last week, Snap reported its slowest quarterly sales growth ever, which sent its stock plunging 28%. The one bright spot was Google’s closely watched cloud business, which is viewed as one of the firm’s best bets for growth as the core search business matures. Sales at Google Cloud increased 38% last quarter from a year ago, and the segment reported a smaller-than-expected net loss.

After Alphabet’s and Snap’s disappointing results, expectations weren’t running high for Meta – another tech giant highly dependent on the digital ad market. But on top of the decline in advertisers’ budgets due to economic uncertainty, Meta is also contending with 1) rising competition for Instagram from rivals such as short-form video app TikTok; and 2) a recent change in Apple's privacy rules that made social media ads less effective. All those challenges conspired to push Meta’s revenue 4% lower last quarter from a year ago – the firm’s second-straight quarterly decline. Add to that rising costs, and Meta's net income fell an eye-watering 52% – a bigger drop than analysts had forecasted. To cap things off, Meta gave a worse-than-expected revenue outlook for this quarter too. No surprise then: the firm’s shares tumbled 20% after the update.

Moving on to Amazon, which also reported disappointing results. Sales at the firm’s ecommerce business grew 13% last quarter from a year ago. Amazon’s cloud business, meanwhile, grew its revenue by a worse-than-expected 27%, marking the cloud unit’s slowest YoY growth since Amazon began breaking out the division’s performance back in 2014. Slowing growth is a bad omen for the profit-making cloud division that’s been funding Amazon’s other businesses. To cap things off, Amazon gave a worse-than-expected outlook for the current quarter, which includes the critical holiday selling season. The firm expects sales to rise by just 2% to 8%, which would be the slowest holiday-quarter growth in the company’s history. Amazon’s shares fell 13% after the update.

Finally, Apple delivered just enough good news in its quarterly update to avoid its stock being slammed by investors. iPhone sales, which account for almost half of Apple’s revenue, rose by a worse-than-expected 10% last quarter from a year ago. But good performance elsewhere meant Apple’s overall revenue grew by a better-than-expected 8%. That figure would’ve been 6 percentage points higher had it not been for the strong dollar. Apple’s active installed base of devices, meanwhile, hit a new all-time high. In theory, that means the firm has more users to sell its profitable services to – a key source of future growth. Overall, an okay results update that received an okay investor response: Apple’s shares were basically flat after the news.

Commodities

The graph below shows global stocks of copper (i.e. inventories of the metal in warehouses) have slumped this year. Those alarmingly low levels mean the copper market today has only enough inventory to cover 4.9 days of global demand – and is expected to finish the year at just 2.7 days, according to commodity trading giant Trafigura. For reference, copper stocks are usually counted in weeks, not days. Limited inventories raise the risk of a sudden price spike should there be further stock drawdowns and a dash among commodity traders to secure supplies.

That upside risk only adds to the bullish case for investing in copper. The red metal – used in everything from wind turbines and solar panels to electric wires and EVs – will continue to see its long-term demand boosted by megatrends like renewable energy and the electrification of transport. What’s more, with the energy crisis thrown up this year by Russia, Western governments are working more urgently to reduce their reliance on fossil fuels, giving copper-dependent technologies a boost.

Some copper bears are not convinced though, arguing that the slowdown in China’s property market – where the metal is used in wiring, plumbing, and facades – and a potential global recession will weigh on demand. Those fears have, after all, sent copper’s price down about 30% from the record high it hit back in March. But Trafigura expects EV- and infrastructure-related copper demand to more than make up for the weakness in China’s real estate sector. Time will tell who’ll prove to be correct.

Next week

The third-quarter earnings season continues next week. Some big names reporting include Pfizer, Advanced Micro Devices (AMD), Airbnb, Uber, Qualcomm, Moderna, Block (formerly Square), Coinbase, PayPal, and Starbucks. On the economic front, we have eurozone GDP numbers on Monday and unemployment data on Thursday. Next week also brings important interest rate decisions from the Fed on Wednesday and the Bank of England on Thursday. Finally, there’s the US jobs report on Friday.