The Media Has It Wrong

Stocks dipped at the open but quickly turned around. Currently, the Dow is up 278 points and the S&P is up .45%. The VIX fear gauge continues to bleed lower. Earnings announcements continue to trend better than feared. Just as important, the dollar is weaker again today and bonds are rallying as yields tick lower. These are risk-on signals, at least for the present.

Microsoft (MSFT) reported third quarter sales and profits ahead of Wall Street projections, yet the stock is down 6% this morning. Cloud computing revenue slowed, but still managed 35% growth (42% excluding currency fluctuation). Sales of Windows software to PC makers fell 15%, suggesting softening demand in that segment. It is true that both gross and operating profit margins improved during the quarter, but investors are worried about slowing growth.

Alphabet (GOOGL) missed revenue & earnings estimates and the stock is down about 6% this morning. Cloud computing came in better than expected with solid growth, but of course that business line isn’t profitable. The big news is that search advertising revenue suffered from a strong dollar (-6% impact) and lower ad spending from some clients. Google’s one-of-a-kind digital ad platform is very popular with small and medium-size businesses, which seem to be increasingly conservative in the face of uncertainty about the economy. In the past, search has been rather recession-resistant, but at the moment investors are in the mood to assume the worst. Wall Street analysts are increasingly fixed on one metric: profit margin. And the company’s gross margin fell to 66.2% from 68.9% in the prior quarter. Today’s decline pushes the stock 35% below its February peak. And despite clearly superior growth prospects, the stock is trading at a P/E ratio at parity with the S&P 500 Index. In short, the stock is cheap for long-term investors.

Visa (V) grew sales & earnings by 19% during the third quarter, and the stock is up 6% this morning. The CEO noted some short-term uncertainty but sees no sign of oncoming recession. In fact he isn’t planning on a recession for 2023, but announced a dividend hike and increased stock buy-back program.

Beware over-reaction to these reports, especially in the news media. Microsoft’s 35% year-over-year growth in its Azure product was called out as “weak” by CNBC and “lackluster” by Bloomberg. Overall revenue exceeded Wall Street consensus projections, but is now characterized as “disappointing.” Likewise, yesterday Bloomberg News complained that “Visa’s Spending Growth Slows as Consumers Are Hit by Inflation.” Digging into the numbers, spending on the Visa payment network grew 10.5% vs. 12% in the prior quarter. So Visa is growing faster than overall consumer spending and that’s somehow unacceptable? This article distorts the CEO’s own commentary. Spotify stock fell after the company reported better than expected sales and profits, adding more new subscribers than expected. At this point, we’re looking for a boogeyman in every closet.