Mixed Economic Signals Continue
A sharp drop in IPO and M&A activity weighed heavily on shares of Goldman Sachs. (Photo by Michael … [+] M. Santiago/Getty Images)
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Key Takeaways
Tech Stocks Continue Higher Financial Companies See Sharp Declines In Profits Oil On The Rise
After a long holiday weekend, stocks were relatively unchanged on Tuesday as measured by the S&P 500, but the Dow took it on the chin, due to the weighting of that index. However, the Nasdaq composite did manage to notch a tiny gain, making it seven consecutive days in a row that index has moved higher, its best string of wins since November of 2021. Elsewhere, earnings season is beginning to pick up steam as financial companies continued reporting.
Goldman Sachs and Morgan Stanley MS both reported significant drops in profit. Goldman continues struggling in the retail sector and with a weak IPO market in 2022, the company saw profits drop 66% for the quarter. Meanwhile, profits at Morgan were down 40%, but still ahead of estimates for revenue and profits. Both companies made note that they’re setting aside more reserves for potential loan losses in anticipation of a recession and that they may need to look at further cost cutting.
In the airline sector, United Airlines reported its first full year of profits in four years. The company also provided guidance and expects profits to quadruple in 2023. This comes after Delta Airlines reported stronger than expected numbers last week and gave an upbeat assessment. Next week, American Airlines will report their earnings after providing positive guidance last week. Despite a questionable economic outlook, airline travel remains strong.
Other companies making news this morning include Apple AAPL , who announced they would be delaying the release of their augmented reality (AR AR ) headset and would instead focus on a less expensive mixed-reality headset. In premarket trading Wednesday, the stock is up slightly and that could be a sign investors approve of the move and remain more concerned about meeting chip demand for iPhones than new product launches. We also heard from Microsoft MSFT overnight. The company is expected to announce another round of layoffs beginning as early as today.
Elsewhere, we’re seeing some interesting moves in both crude oil and bitcoin. After hitting a low of just under $73 in December, oil prices have been steadily climbing. In premarket trading, oil is up around 2% and if those gains hold, it will mark seven consecutive days of gains. Bitcoin BTC has also been making a strong move higher of late. After closing below $17,000 near the end of December, bitcoin has staged an impressive rally to well over $21,000 in early trading Wednesday. This may be a sign investors are looking for more speculative risk-taking opportunities outside of stocks.
I think there are a couple interesting themes emerging at the moment. The rally in the Nasdaq has largely been a result of aggressive cost cutting measures and a belief inflation has been tamed enough for the Fed to reassess where interest rates need to head and for how long. Some analysts are even expecting rate cuts in late 2023. At the same time, the Fed has remained steadfast in its comments about where it sees interest rates headed and the continued threat of inflation. The rise in oil prices could be a confirmation for the need to remain vigilant when it comes to rates. Therefore, tech stock investors may be playing a game of chicken with the Federal Reserve.
This morning we received more economic data tied to the inflation conundrum. The Producer Price Index (PPI) came in down 0.5% versus expectations of a drop of 0.1% month-over-month. Core PPI was expected down 0.4% but came in at a much weaker than expected -1.1%. Also, Retail Sales, which were expected to be down 0.8% month-over-month, were down 1.1%. Later today, the Fed will also release their Beige Book, giving an update on economic conditions across the country.
It will be interesting to see how the market digests today’s economic data, but I think earnings will remain the bigger focus. On Thursday, after the close, we’ll hear from the first tech heavyweight, Netflix NFLX and then next week companies such as Microsoft, Boeing BA , IBM and Mastercard MA will all report, giving investors a more rounded view of how companies in various sectors performed last quarter and their outlook for 2023. In the meantime, I would continue sticking with your investment plan and long term objectives.
tastytrade, Inc. commentary for educational purposes only.
