Making sense of the markets this week: April 30, 2023

Tech is in the driver’s seat, again 

This is the week that delivered the greatest earnings breadth in terms of the numbers of stocks and earnings dollar value. It’s what’s called an earnings bonanza! Just a handful of large-cap tech stocks powered the S&P 500’s gains during the first quarter of 2023, despite regional banking turmoil and recession fears. As I said in the below tweet, that’s nothing new for the U.S. stock market, and we’re seeing a repeat. In this tweet you’ll see how the individual tech giants contributed to the market returns:

Nothing new. The returns for the S&P 500 driven by a handful of stocks. More than 5% of the S&P 500’s year-to-date gain of 6.6% gain is down to just seven tech titans; S&P 500 futures are currently indicating a positive start to the day. via @SPGlobal pic.twitter.com/Oj42XhKDye

— CutTheCrapInvesting (@67Dodge) April 26, 2023

U.S. stocks were higher last Wednesday, as a surge in shares of Microsoft (MSFT/Nasdaq) buoyed other big technology names. On Wednesday, nine of the 11 S&P sectors were trading in the red. The tech sector rose more than 2% and tacked on another 2% on Thursday. However, futures were down Friday morning after Amazon (AMZN/Nasdaq) shares popped Thursday only to give it all back and then some just before we went to press. 

In last week’s column, I suggested that the regional bank crisis could be far from over. And, right on cue, First Republic Bank (FRC/NYSE) stepped up to the guillotine. 

The lender’s stock shed nearly 50% last Tuesday after it disclosed more than  USD$70B of deposit outflows in its first quarter; the stock extended its fall last Wednesday. 

On Monday, Bob Elliott, former Senior Investment Executive at Bridgewater Associates, suggested that First Republic was a zombie bank. 

Stopped by @CNBCOvertime to talk $FRC release.

FRC is a zombie bank, and if anything report was worse than expected.

Good macro news is that FRC pain implies less borrowing from the Fed from other banks. Suggests a more contained ‘crisis’ than previously known. https://t.co/dAUM2HjhIF

— Bob Elliott (@BobEUnlimited) April 24, 2023

This quote from Seeking Alpha frames the week:  

“There’s been a bit of a tug-of-war in markets over the last 36 hours between the dominance of U.S. tech pulling aggressively on one side against the still shaky foundations of U.S. regional banks on the other. … Meta’s positives after-the-bell earnings have helped again overnight but the battle is set to continue.”

—Jim Reid, Deutsche Bank

Google and Microsoft were two of the tech stars in the headlines. The market has certainly attached a premium to how many times management mentions the letters AI, for Artificial Intelligence. The potential of AI is driving the enthusiasm. 

Microsoft’s stock soared after its earnings release, while Google declined.

It’s a tale of two techs—and perhaps a lesson in disruption. Microsoft is looking to challenge the search monopoly of Google, thanks to Microsoft incorporating its AI into its search engine Bing. Bing was an original rival to Google, before Google became THE go-to search engine. 

Microsoft has been one of the tech giants taking the lead in AI due to its investment in, and work with ChatGPT developer OpenAI.

Cloud services reported $17.5 billion in revenue, an 11% increase from a year ago. Intelligent Cloud revenue rose 16%, to $22.1 billion, while more personal computing, which includes XBox content and services. And Windows commercial products, saw sales decline by 9%, to $13.3 billion.

In a statement from Microsoft, chief executive officer Satya Nadella said the company’s results show the beginning of “a new era of computing” where “the world’s most advanced AI models are coming together with the world’s most universal user interface—natural language.”

Here’s some insights from the Alphabet statement: 

“We are pleased with our business performance in the first quarter, with Search performing well and momentum in Cloud.” 

—CEO Sundar Pichai

“We remain committed to delivering long-term growth and creating capacity to invest in our most compelling growth areas by re-engineering our cost base.”

—CFO Ruth Porat

Here is a breakdown of the revenue by segment: 

• Google search and other advertising: $40.36 billion, up 1.9%
• YouTube ads, $6.69 billion: down 2.6%
• Google Network ads” $7.5 billion down 8.3%
• Google’s other products: $7.41 billion, up 8.8%
• Google Cloud: $7.45 billion, up 28.1%
• Other Bets: $288 million, down 34.5%

Meta chief executive officer Mark Zuckerberg mentioned AI on the earnings conference call, so of course, shares were up sharply on Thursday. 

“Our AI work comes in two main areas.. First, the massive recommendations and ranking infrastructure that powers all of our products from Feed to [short-video product] Reels to our ad system to our integrity systems, and that we’ve been working on for many, many years.” 

—CEO Mark Zuckerberg

Here’s more Meta earnings framing: 

$META

Sales up 3% on the year

Profit per ad down 17%

Stock up 12%

lol

— TIC TOC TIC (@TicTocTick) April 26, 2023

This data point is interesting, or even scary. Meta reaches more than three billion people each day.

Playing defence with the consumer staples sector 

I am a big fan of a lower-risk portfolio for retirees and for those within several years of that retirement start date: the retirement risk zone. 

While we can use bonds and cash in a portfolio to reduce risk, we can also consider defensive stocks and sector exchange traded funds (ETFs). We can look primarily at healthcare, consumer staples and utilities. The companies within those three sectors will be less exposed to economic swings. Also, many of the consumer staples companies can provide some inflation protection. 

This earning season has once again demonstrated the resilient nature of these companies. They also expect continued growth, even though recession clouds are on the horizon. 

Let’s take a look at four consumer staples stocks:

For 2023, the company now expects to deliver 8% organic revenue growth (previously 6%), and 9%core constant currency EPS growth (previously 8%).

On guidance, the company said that operating profit will be “up low double digits” from a previous outlook of “up mid to high single digits.”

P&G raised its outlook for organic sales growth to approximately 6% versus the prior fiscal year from a prior growth range of 4% to 5%.

For the remainder of the year management projects 3-6% sales growth. Organic sales growth in the first quarter was present in every division and in all four categories.

As for the energy space 

Here are some takeaways from the energy sector.

For context amid a falling oil price environment, this is from the previous quarterly report: XOM on reported non-GAAP EPS of $3.40 for its fourth quarter on January 30, 2022, beating estimates by $0.12. Revenue of $95.43 billion (up 12.3% year-over-year) was ahead of consensus by $5.22 billion.

For context amid a falling oil price environment, this is from the previous quarter’s report:

On January 27, 2022, CVX reported a non-GAAP EPS of $4.09 for its fourth quarter, missing estimates by $0.20. Revenue of $56.47 billion was (up 17.3% year-over-year) was ahead of consensus by $2.5 billion.

Energy investors might be pleased with that very solid performance. Oil (U.S. WTI) is down over 25% over the last year. 

The creator of the 4% rule is mostly in cash 

This is more than interesting. Bill Bengen, the creator of the 4% “rule,” is an active portfolio manager. He’s mostly in cash. He confesses on the short video below that he is only 2% in stocks, 3% in gold and a whopping 90% in cash, via America’s CDs (certificates of deposit, which are the equivalent of Canada’s guaranteed investment certificates or GICs.)

What’s the man, the myth, the legend Bill Bengen invested in? Hint: Not the asset class his research tells him to invest in. 😂

Don’t miss this conversation with the man who introduced financial planning to the 4% safe withdrawal rate, wherever you get your podcasts. 🎙 pic.twitter.com/adjRmMItdz

— Money with Katie ☕️ (@moneywithkatie) April 12, 2023

Surprisingly, he admits to active portfolio management and active asset allocation. He’s waiting for the recession, or maybe he simply doesn’t need any growth in the portfolio. 

The most popular index style underperformed

The equal-weight S&P 500 index (RSP/NYSE)—which debuted on April 30,2003—has returned investors 469.6% over its 20-year lifetime. At the same time, the most-replicated cap-weighted, S&P 500 (IVV/NYSE) delivered a return of 348.9% over the same 20-year period. 

The cap-weighting method can, at times, create too much concentration in overvalued stocks. For example, the top 10 holdings of SPY, VOO, and IVV together represent over 27% of each of the underlying ETFs. Meanwhile, RSP’s equally weighted strategy means those names equate to only 2.29% of the ETF. 

Handoff to Kyle 

Regular “Making sense of the markets this week” columnist Kyle Prevost will be back for the next installment. And it should be an interesting week for him to report on. The U.S. Fed will make another rate decision. It would be a shock if it did not deliver a 0.25% rate increase, as per consensus. From there they certainly might hit the pause button.

There were other signs this week that the U.S. economy is beginning to cool. As I wrote in last week’s column, the economic forces designed to weaken the economy are moving in slow motion. 

1Q23 GDP +1.1% (q/q ann.) vs. +1.9% est. & +2.6% in prior quarter … slowest growth since 2Q2022 (which was a negative quarter) pic.twitter.com/HjLOF8zERX

— Liz Ann Sonders (@LizAnnSonders) April 27, 2023

On Thursday and Friday, the stock markets took this bad news as good news. 

The Dow Jones Industrial Average rose 524.29 points, or 1.57%, to a close of 33,826.16 at the end of Thursday’s trading the S&P 500 gained 79.36 points, or 1.96%, to 4,135.35 and the Nasdaq Composite added 287.89 points, or 2.43%, to 12,142.24.

A cooling economy might also help to bring inflation under control. 

Dale Roberts is a proponent of low-fee investing, and he blogs at cutthecrapinvesting.com. Find him on Twitter @67Dodge for market updates and commentary, every day. 

About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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