Bad S&P 500 earnings are in the hands of the Fed

(Bloomberg) – Is this week good or bad as Alphabet Inc. tell investors that demand for advertising that has boosted top sales by 50% in two years is starting to wane? Depending on what you mean is bad, and there is rarely an argument over definitions that make more sense for markets and the economy.

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Obviously that sucks for shareholders of parent company Google, who have seen $70 billion wiped out in a single stroke. Tech speculators have generally showered, with the Nasdaq 100 index falling 2.3% on Wednesday. And the news doesn’t help anyone hoping the economy will avoid a recession, given the well-known forward-looking aspect of the advertising market.

But those audiences aren’t everyone. Another problem is that people worry that inflation is still out of bounds in any way to subdue it. They include Jerome Powell, whose Federal Reserve is doing everything it can to prevent prices from skyrocketing.

For them, it was a probable case that bad corporate news had begun to turn out to be good – or at least a necessary bad – when taken as a signal of the need to cool off, something which is ultimately positive for economic stability and, someday, our markets. That’s a role long played by macro data points – for example, a weak GDP print can sometimes trigger a market rally – but rarely by data points. micro.

“It’s a feature, not a bug,” Art Hogan, chief market strategist at B. Riley, said by phone. “No one wants to live in a world where bad news is good news, but the bad news we just received from some of the largest companies by market capitalization in the S&P 500 is essential. Needless to say, things are slowing down – the Fed rate hikes must be working.”

As much as investors love a good earnings report, Corporate America’s cash machines disproportionately fueled the inflation boom. A study by Josh Bivens, research director at the Economic Policy Institute, found that as price pressures increase in 2021, fattening margins account for more than half of the increase. Labor costs contribute less than 8% – a change of dynamics spanning from 1979 to 2019.

That investors pay the price for the world’s bigger problems has been a recurring theme of 2022. The Fed’s anti-inflation campaign threatens the economy, sanctions on Russia make it worse. energy markets fell into contraction – few tears were shed as stocks took a hit in the aftermath.

A similar dynamic is starting to take hold of what was previously the basis of hope for established stocks – earnings. Nearly a quarter of companies reporting results this season missed estimates, which are high by historical standards, of data compiled by Wells Fargo’s program. The estimates themselves also reflect severe pessimism built into assumptions. Most recently in May, third-quarter earnings for S&P 500 companies are forecast to grow 9.7%. The expected increase was 2.5% last week.

Convincing investors that the beating involved is good for humanity is a tall order. The pain is rarely worse for anyone holding companies with falling earnings, with penalties averaging 4% this earnings season, the worst in a decade.

At the same time, last week’s market contour, with its slight twist, may be consistent with an argument that the earnings drop is seen by many investors as something other than bad news. Bond yields have fallen for five days, with one of the larger spikes occurring around the time Amazon reported, and both the Dow and the similarly weighted version of the S&P 500 are up. strong.

“It may be a bit uncomfortable, but the reality is that some people might see it as a necessary evil,” said John Stoltzfus, chief investment strategist at Oppenheimer & Co. I think so “.

Microsoft Corporation posted its weakest quarterly sales growth in five years, hit by a strong US dollar, which surged after the Federal Reserve raised interest rates. Alphabet said ad growth for the Google subsidiary was constrained by inflation. Inc. predict sales will be weaker in the holiday quarter as they face consumer spending cuts amid economic uncertainty. And Texas Instruments Inc. — the company whose chips go into everything from home appliances to rockets, and are seen as an indicator of demand across the economy — fell after their forecasts fell short of forecasts. analyst.

According to Anthony Saglimbene, global market strategist at Ameriprise, from a corporate perspective, the bad news isn’t great, but it could be viewed more positively from an economic perspective, because it means The Fed is having a cooling effect on the economy.

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

–With support from Lu Wang and Isabelle Lee.

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