Investors are pretty bad at living in the moment. We're currently in the thick of fourth quarter earnings reports, but traders don't seem to care about how companies fared during the final months of 2022. They're more focused on what's going to happen in the future.
Case-in-point: Earnings calls, where top execs pontificate about their economic outlook, have been moving markets more than earnings-per-share and revenue reports.
What's happening: The mantra on Wall Street has become, as Ritholtz Wealth Management CEO Josh Brown puts it, "ignore the numbers, wait for the call."
Microsoft reported great fourth quarter earnings last Tuesday that beat Wall Street's expectations, but the stock dropped 4% the next day. That's because Microsoft CEO Satya Nadella got on an earnings call with investors and warned of a slowdown in the company's cloud business and software sales. His negative outlook came just as the company announced it was letting go of 10,000 employees, further spooking investors.
Other tech companies are following suit – while things are fine for the time being, they're reporting that the future is foggy.
IBM stock sank 4.5% last Thursday even as the tech titan beat Wall Street's Q4 expectations. The reason for the drop might be because Jim Kavanaugh, IBM's finance chief, warned on the conference call that it would be wise to expect the company's total 2023 revenue growth to be on the low end. IBM also announced layoffs — the company said it plans to cut around 3,900 jobs or 1.5% of its total workforce.
The economic environment is rapidly changing. CEOs on earnings calls are talking more about recession than inflation now, according to an analysis by Purpose Investments.
Wall Street is also beginning to fear an economic downturn more than painful rate hikes and as a result investors are putting more weight on CEO and CFO forecasts.
And they're looking bleak. As of Friday, 19 companies in the S&P 500 had issued forward earnings-per-share guidance for the first quarter of 2023, according to FactSet data. Of these 19 companies, 17, or 89%, issued negative guidance. That's well above the 5-year average of 59%.
"My best guess is that cautious tones on conference calls will be the norm, not the exception," wrote Brown in a recent post. These slowdowns have been partially factored into stock prices, he said, "but not necessarily in full."
The upside: Market reaction appears to go both ways. American Express missed on earnings last week but said that credit card spending was hitting new records and that the future looks bright. The stock shot up more than 10%.
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