The stock market rally moved higher, fueled by sharp gains Wednesday after the latest big Fed rate hike, as Fed chief Jerome Powell signaled rate hikes might begin to slow. The major indexes shrugged off weak results or guidance from Microsoft, Shopify, Walmart, Qualcomm, ServiceNow and Meta Platforms. Google parent Alphabet, Enphase Energy, Amazon.com, Apple and Ford also were part of a massive week for earnings and news. Q2 GDP fell, signaling the straight quarter of slightly declining economic activity.
Stock Market Rally
Despite several big earnings disappointments, another big Fed rate hike and strong signals that the U.S. is in a recession, the major indexes ended with strong gains. The market rally is back in a confirmed uptrend. Treasury yields fell sharply once again.
Fed Goes Big, Markets Bet On Small
The Federal Reserve backed its second straight 75-basis-point hike on Wednesday, turning its key policy rate from easy to neutral. From here on out, especially with the economy softening — or worse — the Fed won't raise rates lightly. In his news conference, chair Jerome Powell said that yet another "unusually large" hike might be appropriate at the next meeting, Sept. 20-21, but policymakers will no longer give forward guidance, basing their decision on incoming data. Stocks staged a huge rally on Powell's uncertainty, with Wall Street betting that the economy will be weak enough and inflation will come down fast enough for a quick end to rate hikes. Markets now expect a rate cut in the first half of 2023. But inflation will have to cooperate for that to happen.
Economy Keeps Weakening
The U.S. economy backtracked 0.9% in Q2, following a 1.6% decline in first-quarter GDP. While back-to-back GDP declines have never happened outside recession, the picture was more mixed. If not for a two-percentage-point drag from lower inventory investment, growth would have been positive. Consumer spending rose modestly in Q1 and Q2. The Employment Cost Index, a measure of wage growth closely watched by the Fed, showed wages grew 1.4% in Q2, up from the first-quarter's 1.2% pace. Growth in total compensation, including benefits, eased to 1.3% from 1.4%.
Still, evidence of economic weakness is starting to pile up. New jobless claims were revised up to 261,000 in the week through July 16 and only eased to 256,000 last week. Those are the highest levels since November and up more than 50% from March lows. New-home sales dived to a 590,000 annual rate in June, the lowest since April 2020 and down 30% from December. The Fed's favored inflation indicator rose 1% in June, with a 0.6% rise excluding food and energy. The PCE inflation rate rose to 6.8% from 6.3%, while the core rate ticked up to 4.8% from 4.7%.
Amazon Soars On Revenue
Amazon jumped as Q2 revenue rose 7% to $121.2 billion beating views thanks to strong growth at high-margin Amazon Web Services. The Q3 outlook also was strong The positive results came despite continued inflationary pressures in fuel, energy, and transportation costs.
Apple iPhone, Services Drive Quarter
Apple beat Wall Street's targets for its fiscal third quarter ended June 25 thanks to better-than-expected iPhone sales and services revenue. Total sales rose 2% year over year to $83 billion, while earnings per share dropped 8%. In the June quarter, Apple iPhone sales rose 3% to $40.67 billion. Services revenue jumped 12% to $19.6 billion. However, sales declined for Mac computers, iPad tablets, and home and accessories devices. Apple said it expects sales growth to accelerate in the September quarter, despite macroeconomic headwinds.
Microsoft Rises On Full-Year Outlook
Microsoft missed forecasts for its fiscal fourth quarter ended June 30, citing unfavorable foreign exchange rates and weak PC sales. But the software giant rose after predicting double-digit revenue and operating income growth for its current fiscal 2023. The company sees continued momentum in its commercial cloud computing businesses and will focus on market share gains across its portfolio.
Intel, Qualcomm Reports Disappoint
Intel tumbled after the chipmaker badly missed second-quarter sales and earnings targets and guided lower for the current period and full year. Qualcomm beat June-quarter estimates but came up short with its guidance for the September quarter, blaming weakening smartphone sales. However, most chipmakers so far this earnings season have delivered beat-and-raise reports, including CTS, Impinj and Texas Instruments in the past week. Chip-gear makers that beat second-quarter targets but missed with their outlook include Teradyne and FormFactor. However, top semiconductor equipment makers KLA and Lam Research posted beat-and-raise reports.
Google Misses But Search Ads Solid
Google-parent Alphabet reported Q2 EPS fell 11%, missing views. Gross revenue rose 16% to $69.7 billion, slightly beating. Advertising revenue rose 11% to $56.29 billion, edging by estimates. However, YouTube revenue and cloud-computing revenue slightly missed.
Enphase Energy Soars On Earnings, Climate Bill
The solar power company reported second-quarter EPS surged 102% while revenue ran up 67%. Enphase also guided higher for Q3 revenue. ENPH stock spiked higher Wednesday, then added to gains Thursday with other solar stocks as Senate Democrats struck a deal to provide fresh green-energy subsidies.
Meta Dives On Earnings, Guidance
Meta Platforms reported second-quarter EPS fell 32%, below views, with revenue dipping 1%, the first year-over-year sales decline ever. Its revenue outlook also missed expectations. The outlook reflects a continuation of the weak advertising demand environment, as it searches for new revenue streams.
Oil Majors Have Major Profits
Exxon Mobil and Chevron topped estimates with booming growth. Exxon earnings surged 276% with sales spiking 70%reported earning $4.14 per share, a 276% increase. Sales spiked 70% to $115.7 billion. Capital spending is up 21% compared to 2021. Chevron's EPS leapt 240% with revenue up 83% to $68.7 billion. Capital and exploratory spending in the first half of the year increased 26% to $6.7 billion. Both stocks are starting to rebound after a recent pullback.
Cadence Surges After Q2 Report
Cadence Design Systems reported a 26% EPS gain with sales up 18%, both beating. The maker of electronic systems design software also guided higher for the full year. Cadence and industry peer Synopsys are benefiting from industry trends such as increasing semiconductor complexity and custom chip designs. Both stocks surged.
GM Misses, Ford Profit Soars
General Motors and Ford both maintained earnings outlook and expectations for growing delivery volumes in 2022, as chip and supply disruptions ease. But there were stark differences. In Q2, Ford EPS vaulted 423% as revenue jumped 50%, both crushing views. GM earnings slumped 42% despite revenue rising 5%, an overall miss. Auto sales in the U.S. fell for GM in Q2, but it rose for Ford, which was able to complete and ship trucks that it had held in inventory awaiting parts. Chip woes should ease in the second half, GM said. GM will slow hiring but is ramping up securing battery materials. Ford hiked its quarterly dividend.
Shopify Slashes Jobs As Demand Falls Short
The e-commerce software firm cut 10% of staff, with saying it misjudged the long-term impact of the Covid pandemic. A day later, Shopify reported a surprise loss of 3 cents for the June quarter while revenue growth decelerated for a fifth-straight quarter. Shares plunged on the layoffs but slashed losses.
Drug Earnings
Pfizer, Merck, Bristol Myers Squibb, AstraZeneca and GSK all beat expectations, though outlooks for 2022 were more mixed. Pfizer's adjusted EPS jumped 92% as sales increased 47% to $27.74 billion. That included almost $17 billion from Pfizer's Covid vaccine and antiviral pill. Merck's adjusted EPS spiked 207% and sales grew 28%. Bristol Myers' EPS climbed 18% and sales edged 2% higher. GSK's EPS rose 23% and sales 19%. Meanwhile, AbbVie EPS beat but sales just fell short.
Walmart Cuts Profit Outlook
Walmart slashed its full-year profit outlook amid efforts to cut prices and clear clothing and other unsold products from its shelves, as customers rethink their budgets following decades-high inflation. The big-box retailer expects adjusted EPS to fall 11% to 13%, compared with its already-lowered forecast in May for a roughly 1% drop. And it said it expected a tougher stretch for its general merchandise business for the rest of the year. Walmart said rising food prices had hindered customers' ability to spend on that merchandise, "requiring more markdowns to move through the inventory, particularly apparel." However, the company nonetheless bumped up its sales forecasts, citing the "heavier mix" of food and consumables.
Boeing, GE Show Turnaround
Boeing and its jet-engine supplier General Electric both showed signs of turnaround momentum as commercial aviation continues to recover from the pandemic hit. In Q2, Boeing burned less cash than expected while GE unexpectedly generated free cash flow. However, Boeing posted a wider-than-feared Q2 loss of 37 cents as its defense business weighed, while GE nearly doubled EPS to 78 cents, with its jet-engine unit driving growth on services strength. Both GE and Raytheon Technologies, another Boeing engine supplier, reaffirmed full-year outlook.
Visa and Mastercard beat earnings and revenue estimates, as consumers eagerly resume travel spending. Visa earnings grew 33% year over year, with revenue up 19% to $7.3 billion. Mastercard earnings popped 31% as sales climbed 21%.
News In Brief
Stryker trimmed its full-year earnings outlook, noting exchange-rate challenges continue to impact its profits. Further, the medtech firm missed Q2 views with flat EPS and sales growth slowing to 5%. But shares rose.
JetBlue will pay $33.50 a share for Spirit Airlines, which agreed to the deal after months of debate, breaking a deal for a takeover by Frontier Group last night. SAVE holders will get $2.50 a share once they OK the deal, plus 10 cents a share monthly, starting in January, as the agreement goes through what will likely be a tough regulatory review.
ServiceNow reported Q2 EPS climbed 15% to $1.63 while revenue rose 24% to $1.75 billion, both topping. But the business software giant forecast September-quarter subscription revenue just below estimates. NOW stock fell.
