Market participants celebrated Microsoft's (MSFT) headline numbers on Tuesday night which showed a slight earnings beat but comments by management about the challenges that lie ahead trapped the early buyers. Microsoft was up as much as 5% last night but is now indicated to be 1.5% lower early on Wednesday morning. There is at least one downgrade so far this morning by BMO Capital to "underweight".
The primary thesis of market bears has been that the market has yet to discount slowing economic growth. The thinking is that forward earnings estimates are still too high, and valuations will come down as multiples erode.
The response to Microsoft's earnings adds weight to the bear's arguments, but there is still a slew of important earnings reports for the market to digest.
The next major earnings report comes tonight from Tesla (TSLA) . Tesla has enjoyed a sizable run after hitting a multi-year low on January 6, but the debate over Elon Musk and Twitter is still raging. It will be a major topic during the company's conference call later tonight.
So far, there have been few substantial EPS misses, but there are far fewer beats than usual, and guidance has been the main issue. The report from Capital One (COF) was the worst of the evening and reflected much higher credit card charge-offs than expected.
The primary issue now is whether Microsoft earnings will produce a theme reflected in other reports. Microsoft's growth was the slowest in six years and one of the key comments last night was, "The company is seeing customers exercise caution in this environment, and we saw results weaken through December."
The bulls have been emboldened recently by strong underlying support, good breadth, and poor positioning by hedge funds. The problem is that the market has not taken worries about slowing growth and a recession very seriously, but Microsoft is bringing the problem to the forefront.
My game plan is to watch closely to see if the recession theme gains further traction and start watching for favored names to test underlying support.