Tech Leads Market Lower

Major stock market indices sank this morning following Microsoft’s earnings announcement (see below). Currently, the Dow is down 200 points and the S&P 500 is down .85%. The tech-heavy Nasdaq is faring worse, down 1.2%. Commodities are mostly lower as well except for WTI crude oil, hovering around $80/barrel. The bond market is mixed, with softness concentrated in long-term bonds.

Microsoft (MSFT) reported mixed fourth quarter results and even worse forward guidance. Revenue growth slowed to just 2% from a year ago, and operating profits fell 6%. It’s pretty clear enterprise customers are spending less on technology. I should point out that Wall Street anticipated the slowdown. And CEO Satya Nadella explained its cause. “During the pandemic there was rapid acceleration. I think we’re going to go through a phase today where there is some amount of normalization in demand.” This is true of most companies that greatly benefitted from Covid’s stay-at-home, work-at-home trend. Demand was pulled forward, and now we’re dealing with the fallout.

What shocked investors (momentarily) was management’s warning that its Azure cloud computing business will continue to slow. This has been the company’s primary growth driver, and whereas sales grew about 35% in each of the last couple of quarters, the CEO now expects something closer to 30% in the current quarter. Of course, that’s not the end of the world, but it does explain the recent layoff announcement.

Weakness quickly spread to other cloud computing players. Amazon (AMZN), Alphabet (GOOGL) and Salesforce (CRM) all gapped down at the open this morning. But those losses are quickly reversing. The reality isn’t as bad as this morning’s headlines suggest. With Microsoft’s stock down 30% from its 2021 peak, a lot of risk is already priced in.