Microsoft (MSFT) Steals the Show

Stocks opened a bit lower this morning despite some good earnings announcements. At the moment, the Dow is down 110 points, and the S&P 500 is flat. Technology, communications and consumer discretionary sectors are holding onto gains, but most everything else is lower. Earnings season has been positive overall, but one of the main themes is lower profit margins due to global supply chain problems. Commodities are giving way this morning, with oil down 1.5% and copper down 2.2%. the bond market opened higher as yields fell back. The iShares 20+ Year Treasury Bond fund (TLT) is up 1.3% today. Treasuries have been selling off since early August and by guess is that investors are stepping in to buy.

Amid the debate as to whether higher inflation will be semi-permanent or will revert toward 2% within the next year or two, Bloomberg ran an op-ed this morning pointing out that “The key question…is whether the Fed…is more concerned with fighting inflation or lowering the chance of a recession.” There’s an old adage warning investors not to “fight the Fed.” At the moment, it seems reasonably clear that the Fed is more focused on lowering the chance of recession. Fed officials often say that they’re willing to allow inflation to exceed their long-run 2% target for some time, and they’ve extraordinarily careful and patient about even planning for the removal of monetary stimulus. Of course, when that changes, investors will sit up and take notice. Even now, the level of Treasury yields suggests investors believe the Fed will “bring down inflation rates.” The market “hardly seems to predict hyperinflation.” So the good news is that we’re not likely to end up with 1970s-style inflation, but the bad news is that eventual removal of stimulus will be a headwind to capital markets for a while.

Microsoft (MSFT) reported excellent third quarter results yesterday afternoon and the stock is up 4% today. Revenue shot up 22% from year-ago levels, and the could services business grew 50%. December quarter guidance is above analysts’ expectations as well. The CEO noted strong corporate demand for software because “In an inflationary environment, the first place business should go to is how to really ensure that they’re able to get productivity gains.” The company has added 23,000 new employees in the last year and is clearly in growth mode.

Coca-Cola (KO) grew sales by 16% and earnings by 18% during the third quarter, beating Wall Street forecasts. The company is clearly facing higher commodity costs and sporadic shortages, but the CEO says the business is already back to 2019 volume and sales levels. Management raised full-year 2021 guidance for sales, profits and cashflow. I have to say that despite global supply chain issues and the fact that restaurant soda drink volumes have not yet fully recovered, this announcement is excellent.