Tech Earnings Jitters and Interest Rate Worries Power Market Selloff

Barry Adams
26 Oct, 2023
New York City

Investors turned cautious in Thursday's trading, and tech stocks faced another day of sell-off after the U.S. economy expanded at a faster pace in the third quarter.

The surge in consumer spending to a 4% annual pace in the third quarter from a 0.8% rate in the previous quarter accelerated the U.S. economic expansion.

However, economists were quick to point out that consumer spending growth is not sustainable, and economic growth is likely to slow down considerably in the fourth quarter.

But the damage was done on Wall Street, and high growth and tech stocks extended losses over the weeks, and jittery investors looked for reasons to sell even when Facebook parent Meta Platforms reported a surge in quarterly earnings.

The Nasdaq Composite dropped more than 1% and extended its decline to 10% from its high in late July, entering bear market territory.

Meta Platforms reported quarterly revenue and earnings that showed strength in the company's business, but investors turned cautious after the company cited a weakening advertising growth rate in the current quarter.

Big tech companies like Microsoft, Google-parent Alphabet, Meta Platforms, and IBM are reporting healthy revenue and earnings, but these companies are still falling short of investors inflated expectations, as reflected in their stock prices.

Investors are divided about the future direction of short-term and long-term interest rates, and despite the repeated forecasts of an economic slowdown over the last year, the U.S. economy continues to expand at a faster-than-expected pace.

 

Consumers Power U.S. GDP Growth In Third Quarter 

The U.S. economy expanded at annual pace of 4.9% in the third quarter, faster than 2.1% in the second quarter and at the fastest pace since the fourth quarter of 2021. 

The economy managed to accelerate its  expansion despite the Federal Reserve's efforts to cool the economy by increasing its short-term benchmark rate to a 22-year high near 5.5%. 

The increases in consumer spending, exports, business investment in inventories, government spending at all levels, and residential fixed investment  was partly offset by a decline in nonresidential fixed investment. 

The economy's total output of goods and services was kicked in higher gear after consumers accelerated their spending on high-ticket items from cars to travel and restaurant meals. 

Consumer spending accelerated to 4% from 0.8% in the second quarter, the Commerce Department noted in the report released Thursday. 

International trade also contributed the growth story after exports rebounded 6.2% from the decline of 9.3% in the second quarter, and imports also increased by 5.6% compared to a decline of 7.6% respectively. 

Residential investment increased for the first time in nearly two years, and rose 3.9% from the decline of 2.2% in the previous quarter. 

On the other hand, nonresidential fixed investment declined for the first time in two years by an annual pace of 0.1% from the increase of 7.4% in the second quarter.  

Government spending rose at a faster annual pace of 4.6% from 3.3% in the second quarter.  

The breakneck pace of the economic expansion is expected to cool in the current quarter, after the economy adjusts to Federal Reserve's short-term rate hikes and elevated long-term borrowing rates begin to cool consumer and business spending. 

 

U.S. Indexes and Yields

The S&P 500 index decreased 1.2% to 4,138.16, and the Nasdaq Composite dropped 1.8% to 12,595.61. 

The yield on 2-year Treasury notes decreased to 5.04%, 10-year Treasury notes inched lower to 4.85%, and 30-year Treasury bonds edged down to 4.99%.

Natural gas prices soared more than 8% after the latest weekly report from the U.S. Energy Information Administration showed that U.S. utilities added 74 billion cubic feet of gas into storage in the week ending on October 20, lower-than-expected. 

Moreover, weather reports suggested that the weather in the mainland U.S. is expected to be colder than previous estimated in the next two weeks, increasing demand for gas-fired heating. 

But the expectations of record production, kept the price surge in check. 

The average U.S. natural production averaged 103.9 billion cubic feet in October, and the production is expected to surpass the record 103.1 billion cubic feet in July.  

Crude oil increased $1.93 to $83.42 a barrel, and natural gas prices jumped 24 cents to $3.26 a thermal unit.

The dollar index edged higher to 106.39, the level last seen in November 2022, and extended gains from the low of 99.85 on July 13, 2023.

 

U.S. Stock Movers

Southwest Airlines declined 2.2% to $23.60 after the regional airline reported lower-than-expected revenue of $6.53 billion, and the company said it plans to trim its capacity growth after demand growth returns to pre-pandemic levels.

Hasbro, Inc. plunged 12.3% to $48.0 after the toymaker reported weaker-than-expected results in the third quarter.

The company reported quarterly revenue of $1.5 billion and net income excluding one-time items of $1.64 a share.

Bristol-Myers Squibb dropped 5.7% to $53.40 after the company reported quarterly earnings.

The pharmaceutical company said sales of its popular blood cancer drug Revlimid were down because of rising competition from generic drugs.

Royal Caribbean Cruises Ltd. increased 2.2% to $84.0 after the company reported improving quarterly results and added bookings in the third quarter were "significantly exceeding" the levels in 2019.

Revenue in the third quarter increased to $4.1 billion from $3.0 billion, net income soared to $1.0 billion from $32.9 million, and diluted earnings per share advanced to $3.65 from 13 cents a year ago.

"Demand for 2024 has continued to accelerate, with bookings significantly and consistently outpacing 2019 levels. Booked load factors and rates are higher than all prior years while the booking window has continued to extend," the company forecasted in a statement to investors.

Meta Platforms Inc. edged down 0.8% to $297.10 after the parent company of Instagram and Facebook reported strong quarterly results but guided softening advertising revenue in the current quarter.

United Parcel Service, Inc. declined 3% to $140.87 after the company reported quarterly results.

Revenue in the third quarter decreased 12.8% to $21.1 billion from $24.2 billion, net income plunged 56.4% to $1.1 billion from $2.6 billion, and diluted earnings per share dropped to $1.31 from $2.96 a year ago.

UPS now expects full-year 2023 consolidated revenue to be between $91.3 billion and $92.3 billion and a consolidated adjusted operating margin of between 10.8% and 11.3%.

The company reiterated its full-year planned capital expenditure target of about $5.3 billion and dividend payment expectations of $5.4 billion.

UPS now expects full-year 2023 stock repurchases to be approximately $2.25 billion.

 

Weak Earnings and Rate Anxieties Drag Down European Markets

European stocks turned lower in cautious trading ahead of interest rate decisions and weak earnings results from several corporations.

The DAX index and the CAC 40 index dropped more than 0.6% after Mercedes-Benz, Unilever, and BNP Paribas earnings disappointed investors.

The FTSE 100 index also struggled and eased more than 0.5% on the weakness in resource stocks and ongoing domestic economic growth worries.

The European Central Bank left its three key lending rates unchanged, as widely expected.

The central bank paused rates after increasing rates ten times in a row since 2022 and lifting the main refinancing rate to a 22-year high of 4.5% and the deposit facility rate to a record high of 4.0%.

 

Europe Indexes and Yields

The DAX index decreased 1.1% to 14,731.05, the CAC-40 index fell 0.4% to 6,888.96, and the FTSE 100 index eased 0.8% to 7,354.57. 

The yield on 10-yetrar German bonds increased to 2.88%, French bonds traded higher to 3.51%, the UK gilts edged up to 4.60%, and Italian bonds inched higher to 4.91%.

The euro hovered near a three-month low at $1.054, the British pound at $1.205, and the U.S. dollar at 89.81 Swiss cents.

Brent crude increased $1.93 to $88.19 a barrel, and the Dutch TTF natural gas edged higher by €0.89 to €50.81 per MWh.

 

Europe Stock Movers

Mercedes-Benz Group AG declined 5.9% to €57.75 after the German luxury automaker forecasted downward pressure on car sales margins after two years of sales gains.

BNP Paribas SA decreased 3.9% to €53.94 after the French bank reported a decline in third-quarter profit on higher expenses.

HelloFresh SE dropped 11.2% to €21.62 after the meal-kit provider reported third-quarter revenue that fell short of some investors' expectations.

Aixtron SE added 0.6% to €28.68 after the chip systems maker reported a slight increase in sales and earnings in the third quarter.

Danone SA increased 2.9% to €56.47 after the yogurt company lifted its full-year outlook.

Carrefour SA jumped 4.4% to €16.31 after the French hypermarket operator reported an increase in third-quarter sales and the company reiterated its full-year outlook.

Sodexo SA advanced 6.5% to €103.70 after the French flight catering and food company said it plans to list its voucher and benefits division, Pluxee, early in 2024.

Unilever plc declined 3% to 3,895.0 pence after the new chief executive officer released a plan to simplify and restructure the business.

WPP Plc declined 2.3% to 675.20 pence after the U.K.-based advertising company trimmed its outlook for the second time in as many quarters.

Standard Chartered Plc dropped 9.9% after the U.K.-based bank reported a sharply lower quarterly profit because of high impairment charges linked to China's property market.

Net interest margin in the quarter advanced to 1.67% from 1.43% a year ago but eased 4 basis points from the previous quarter.

The emerging-markets-focused bank swung to a net loss of $35 million from a profit of $964 million a year ago.

The bank's high exposure to the Chinese property market negatively impacted quarterly performance, as the lender provided about $1.1 billion in loans to real estate developers in the last two years.

Standard Chartered said provision for credit losses increased 37% from a year ago to $294 million, including $186 million related to its commercial property sector in China.

The bank also lowered the carrying value of its investment in China Bohai Bank by $697 million, reflecting weak macroeconomic conditions and the bank's cautious outlook.

Despite the current weakness, the bank reiterated its annual outlook in a statement released to investors.

The company guided a full-year 2023 net interest margin of 1.70 basis points, income to increase in the 12%–14% range in constant currency, and a return on tangible equity of 10%.

“We continue to expect 2024 income growth to be in the 8% to 10% range at constant currency, and we remain confident of achieving a greater than 11% return on tangible equity,” said group chief financial officer Andy Halford.