Disappointing earnings vs dovish central bank talks

Stock investors could be in for a rocky end to the week after a disappointing number from Apple and a couple of others. At the same time, bulls are hoping more dovish central bank talk will overshadow those let downs.

Earnings

Reporting after markets closed yesterday, Apple and Google-parent Alphabet both missed on earnings and revenue. Notably, Apple’s overall sales for the holiday quarter were about -5% lower than last year’s, the first year-over-year sales decline since 2019. Meanwhile, Alphabet and its YouTube segment are suffering from the widespread decline in ad sales similar to other social media businesses like Snap. Amazon fared a bit better with Q4 revenue that exceeded Wall Street expectations but the company fell short on its forward guidance.

It's worth noting that Amazon's online store sales declined by -2% versus last year, indicating a weaker consumer. However, its advertising revenue surprised with a nearly +20% jump, bucking the trend of other online ad companies. Overall, tech earnings in Q4 have been underwhelming, a big change from quarters past when the sector's profits reliably soared by double digits. The sector's stock price gains have also outperformed the broader market for the past decade or so with investors willing to pay a premium price for future growth.

As of January 2023, the technology sector traded at 20.5 times forward earnings.

By comparison, the energy and financial sectors had forward price-to-earnings ratios of 8.1 and 12.9, respectively.

Bottom line, that math gets less attractive the lower tech's profits fall and the higher interest rates climb. Cigna, Regeneron, and Sanofi report results today.

Data to watch

Earnings on tap next week include Activision Blizzard, IDEXX Laboratories, Loews, ON Semiconductor, Simon Property Group, and Tyson Foods on Monday; AGCO, BP, Carlyle Group, Centene, Chipotle, DuPont de Nemours, Enphase Energy, Gartner, KKR & Co., Prudential Financial, Royal Caribbean, and Xylem on Tuesday; Avalon Bay, CME Group, CVS, Disney, Dominion Energy, Emerson Electric, MGM Resorts, O'Reilly Automotive, Penske Automotive, Robinhood, Uber, and Yum Brands on Wednesday; AbbVie, AstraZeneca, Cloudflare, Duke Energy, Expedia, Hilton Worldwide, Kellogg's, PayPal, PepsiCo, Siemens, S&P Global, TotalEnergies, and Unilever on Thursday; and Enbridge and Fortis on Friday.

On the central bank front, the Bank of England (BoE) and European Central Bank (ECB) both hiked interest rates by 50-basis points yesterday and both indicated at least one more rate hike to come.

While the ECB left the door open to rate hikes beyond the March meeting, the BoE made changes to its policy language that leads some to believe that BoE officials are laying the groundwork to pause their hiking cycle. Bulls see the decision as more evidence that the era of global tightening is nearing an end and think the US Fed will lead the way as soon as the second quarter.

Bulls hope to find more support for that argument in today's jobs data with the January Employment Situation expected to show payroll growth pulling back to +185,000 from +223,000 in December.

Importantly, investors will be scrutinizing the hourly wage gains component with consensus expecting the year-over-year increase to slow to +4.4% from +4.6% previously. The ISM Services Index is also out today.

Next week, data is pretty light with Consumer Credit and the Trade Balance on Tuesday; Wholesale Inventories on Wednesday; and Consumer Sentiment on Friday.