Stocks Shrug off Big Tech Earnings Setbacks

Markets moved higher for a third straight week despite some disappointing earnings reports from the biggest technology companies which wiped off hundred of billions of dollars from their valuations. The blue-chip S&P 500 and technology focussed Nasdaq gained 2.0% and 0.3% respectively. The Dow Jones Industrial Average returned 14.0% during the month, its best October since 1976.

Four out of the five biggest technology companies suffered some sharp falls after reporting third-quarter earnings which fell short of expectations. Only Apple got through the week unscathed.

Technology companies have continued to invest heavily in the future whilst the global economy is slowing. Higher capital expenditure, and staffing costs, at a time revenue growth is slowing has squeezed operating profit margins and companies warned it will likely get worse in the year ahead as many consumers and businesses feel the pinch.

Facebook’s parent company, Meta Platforms, was hit the hardest and its stock dived 25% on Thursday in the wake of its earnings report. It is now more than 75% low than in August 2021.

CEO Mark Zuckerberg has pushed an ambitious investment programme to develop its metaverse and AI infrastructure which has cost $22.8 billion so far this year and is set to almost double to $39 billion in 2023. Its metaverse unit, Reality Labs, is loss making and shareholders are getting frustrated as other parts of the business, Facebook and Instagram, are losing market share.

Google’s parent company, Alphabet, fell nearly 10% on Wednesday for similar reasons – higher staff and investment costs and slowing revenue growth. Revenues from Google Search grew 4.2% to $39.5 billion and YouTube ad revenues declined 2% to $7.1 billion.

Amazon was another to feel the cold shoulder of investors after it warned revenues from the upcoming quarter could be 10%, or $15 billion, below analysts’ forecasts. The fourth quarter is critical for the ecommerce giant as it includes its busiest shopping events, Black Friday and Christmas. Shares fell as much as 20% in afterhours trading before recovering to end Friday’s trading session 7% down.

Whilst the biggest technology companies struggled, big oil thrived in the third quarter, generating huge profits on the back of elevated energy prices. Exxon Mobil reported a quarterly profit of $19.7 billion, three times as much as in the same period lasty year and the highest in its 152-year history.

The world’s second largest oil company will use some of the profits to buy back $30 billion between now and the end of next year and will also increase this year’s total dividend pay out to $15 billion. The announcements didn’t go unnoticed by President Biden who criticised the company for pursuing shareholder friendly initiatives instead of lowering prices for American families.

Calls for a windfall tax on British oil and gas producers grew louder as both BP and Shell also revealed bumper earnings. BP’s underlying profit more than doubled to $8.2 billion during the quarter, boosted by “exceptional” profits from its gas trading division. It will buy a further $2.5 billion of shares in the current quarter and pay off more debt. Net debt has fallen to $22 billion, down from $38.9 billion at the end of 2020.

Shell generated $9.5 billion during the quarter and is on course to break its annual profit record of $31 billion set in 2008. Thus far Shell has avoided paying any windfall taxes due to offsets received for investments and decommissioning costs in the North Sea, but CEO Ben van Beurden asserted the company is willing to pay higher shares in these exceptional times.

Higher energy prices have fuelled inflation, prompting central banks around the world to hike interest rates aggressively. The energy price crisis, amplified by the war in Ukraine, is most acute in Europe and the European Central Bank raised its deposit rate from zero to 0.75% on Wednesday.

Annual Eurozone inflation hit a record high of 10.7% in October but ECB President Christine Lagarde caught many off guard by hinting the bank is ready to adopt a more cautious and slower approach going forward. Perhaps mindful of some criticisms from the leaders of France and Italy, Mme Lagarde acknowledged that the ECB is not “oblivious” to the growing risks of recession and it will take into account the time lag it takes for previous interest rate hikes to impact inflation. Government bonds across the region rallied strongly.

(Cover Image Source: Giorgio Parravicini)