Poor S&P 500 earnings play into the hands of the Fed

(Bloomberg) — Was it good or bad this week when Alphabet Inc. told investors that advertising demand that helped boost its revenue 50% in two years was starting to wane? It depends on what you mean by bad, and rarely has an argument over definitions aimed more at markets and economics.

Bloomberg’s Most Read

Obviously, it was bad for the shareholders of Google’s parent company, who saw $70 billion wiped out in one fell swoop. Tech bulls as a whole took a dip, with the Nasdaq 100 dropping 2.3% on Wednesday. And the news did not help anyone hope that the economy will avoid a recession, given the famous forward-looking aspect of the advertising market.

But these audiences are not everyone. Another is that people fear that inflation will remain beyond any means of controlling it. Among them is Jerome Powell, whose Federal Reserve is doing everything it can to rein in soaring prices.

For them, it’s safe to say that bad corporate news has started to turn into good – or at least a necessary evil – when viewed as a signal of cooling demand, which is ultimately positive for economic stability and , one day, the markets. themselves. This is a role long played by macro data points – a weak GDP print, for example, can sometimes trigger a market rally – but rarely by micro ones.

“It’s a feature, not a bug,” Art Hogan, chief market strategist at B. Riley, said over the phone. “No one ever wants to live in a world where bad news is good news, but the bad news we just got from some of the largest market cap companies in the S&P 500 was necessary. It has to be said that things are slowing down – Fed rate hikes have to work.”

As much as investors love a good earnings report, the Corporate America slot machine has disproportionately fueled the inflationary boom. A study by Josh Bivens, director of research at the Economic Policy Institute, found that with rising pricing pressures in 2021, fattening corporate profit margins accounted for more than half of the increase. Labor costs contributed less than 8% – a reversal of momentum that held from 1979 to 2019.

That investors have to pay a price for bigger global problems has been a recurring theme in 2022. The Fed’s campaign against inflation threatens the economy, sanctions on Russia sent markets into spasms. energy – few tears were cried when stocks suffered afterwards.

A similar dynamic is beginning to take hold in what was once a bastion of hope for all stocks: earnings. Nearly a quarter of companies reporting results this season missed estimates, high by historical standards, data compiled by the Wells Fargo show. The estimates themselves also reflect serious pessimism built into the assumptions. As recently as May, third-quarter earnings for S&P 500 companies were expected to rise 9.7%. The expected gain was 2.5% last week.

Convincing investors that associated moves are good for humanity is a tall order. The pain has rarely been worse for anyone who owns companies that are under-profits, with the average pain hovering north of 4% this earnings season, the worst in a decade.

At the same time, last week’s market contours, with a bit of a twist, could fit a thesis that earnings issues were seen as something other than bad news by the broader investor population. Bond yields fell over the five days, with one of the biggest slumps coming as Amazon reported, and industrials in the Dow and an equal-weight version of the S&P 500 rose sharply.

“It may be unpleasant, but the reality is that some might view it as a necessary evil,” said John Stoltzfus, chief investment strategist at Oppenheimer & Co. is why the market is going up rather than down. I think that’s it.

Microsoft Corp. posted its weakest quarterly sales growth in five years, hurt by a strong US dollar, which surged in the wake of interest rate hikes by the Federal Reserve. Alphabet said advertising growth at its Google subsidiary was being held back by inflation. Amazon.com Inc. forecast weaker sales for the holiday quarter as it faces reduced consumer spending amid economic uncertainty. And Texas Instruments Inc. — whose chips go into everything from home appliances to missiles, and which is seen as a gauge of demand across the economy — fell after its forecast fell short of market estimates. analysts.

From a business perspective, bad news isn’t good, but it can be viewed more positively from an economic perspective, says Anthony Saglimbene, global market strategist at Ameriprise, because it means the Fed has a cooling effect on the economy.

“From a profitability standpoint for S&P 500 companies, they want to navigate it as best they can,” he said in an interview at Bloomberg headquarters in New York. “It will be harder to do the more economic activity slows down.”

–With the help of Lu Wang and Isabelle Lee.

Bloomberg Businessweek’s Most Read

©2022 Bloomberg LP

About Chris McCarter

Check Also

Pound rate against dollar hits 10-week best as dollar slips and stocks rise

The exchange rate between the pound and the dollar (GBP/USD) jumped above 1.1700 and posted …