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w/c 4 March 2024: US stock averages higher again to end the week, prodding at record levels; upcoming week's focus on the Fed's Powell testimony before Congress and the US Employment report

US tech earnings provide a welcome boost to a sagging rally

Intermediate

Last week, I discussed whether the US growth stocks that had driven the rally on Wall Street could keep up the pace. Despite the big tech stocks doing the heavy lifting, there are increasing signs that the Wall Street rally is sagging.

Yesterday’s earnings from the tech giants, Microsoft and Alphabet have provided a welcome shot in the arm to an ailing broad market rally. However, with increasing fears over mounting negative growth trends in the US, this rebound is unlikely to last.

  • The strong quarterly earnings of Microsoft and Alphabet and a positive market reaction for the shares.
  • The concerns of a US economic slowdown are growing.
  • Can the boost from earnings prevent a correction in tech stocks?
Microsoft

Strong quarterly earnings of the tech giants

In the quarterly earnings reported yesterday after the closing bell on Wall Street, Alphabet and specifically Microsoft produced some impressive numbers.

Alphabet beat the consensus on both revenue and earnings:

  • Q1 group sales were $69.8bn (up from $68.0bn a year ago), decisively beating the $68.9bn consensus forecast (according to Refinitiv)
  • Net income of $15bn meant earnings of $1.17 per share (which also beat estimates of $1.09). Although this was a decline from the $16.4bn ($1.23 per share) of a year ago.

There was also a nice little $70bn share buyback into the mix too.

The results came with positive performances in both ad revenue from search and cloud computing.

However, the standout performance was from Microsoft. Again there was a beat in both sales and earnings.

  • Q3 sales of $52.86bn (c. 7% growth year on year) versus $51.02bn that had been forecast.
  • Q3 net income increased by 9.5% to $18.3bn with earnings of $2.45 per share (versus a consensus of $2.24)

But there is a far greater emphasis on the cloud business at Microsoft (accounting for around 54% of revenue). Sales from cloud products such as Azure and Office 365 increased by 22% which played a significant role in the 7% group sales growth and near double-digit growth in earnings.

Furthermore, Microsoft is dedicating around $10bn of investment capital to the development of artificial intelligence products of Open AI and a new Bing AI chatbot. This will so the seeds for further cloud-computing growth.

Both Alphabet and Microsoft shares have risen after-hours, with the impressive showing from Microsoft:

  • Alphabet shares increased by c. 2% to $105.97
  • Microsoft shares increased by c. 8.4% to $298.68

Risk sentiment is weighed down by growth fears

However, as strong as the earnings from the tech giants were yesterday, the bigger picture has investors increasingly in a negative mindset. And that is reflected in the performance chart shown above. The concern is focused on the economic data, with data showing a slowdown in US economic growth trends.

According to several members of the FOMC, just before the blackout period, the Fed seems determined on tackling inflation. That will mean one more rate hike in May. However, looking at the data on economic activity, this is coming at the detriment of US economic growth.

Markets have been digesting the warnings from the US Conference Board in recent days that have talked about the expectation of recession later in 2023. Other lead indicators such as the weekly jobless claims are also reflecting the strains being shown in the labour market.

We can now add a deterioration in consumer confidence too. The US Conference Board’s Consumer Confidence for April fell to 101.3 yesterday, its lowest since July 2022. It was also a significant miss on the 104.0 consensus.

confidence

Strong earnings look to be the saviour for Microsoft

The question is whether this increase in the after-hours shares (not yet reflected in the performance below) can stop what looks to be a building deterioration.

tech stocks

The shares of the tech giants have played a significant role in pulling the broad US equity markets higher in recent weeks. But the trends appear to have turned lower in recent sessions.

It seems that Microsoft may have been saved from a mounting correction.

MSFT

There will be a huge gap higher up to c. $298 early today. If this move above the key resistance around $292/$294 can be sustained and perhaps become support, then it will be encouraging.

The next big resistance is the March 2022 high of $315.95.

There will be a big jump at the open today, especially for Microsoft, but can this be enough to signal a turnaround?

More work to be done for Alphabet shares

Alphabet saw a far more modest 2% jump after-hours yesterday. This goes some way towards arresting the threat of a correction. However, more needs to be done.

There is key resistance between $106.30/$109.17 which needs to be overcome for the buyers to regain a sense of control. This is reflected in the waning momentum of the daily RSI which needs to be improved again.

GOOG

I will be keeping an eye on the support at $103.07 which if broken would be the building blocks of a new corrective trend.

For now, the outlook of Alphabet is yet to be decided.

Editor

Richard is an independent market analyst with over 20 years of experience working for brokers in London. Most recently he has worked with Hantec Markets and Infinox, focusing on trading education, ana... Continued

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