Meta Platforms (META) is the third major big-cap technology stock to issue a poor earnings report this week. META stock has been in a downtrend for more than a year and already had collapsed from more than $380 a share to less than $130, but the market was still surprised by the poor report and the stock is down another 20% in premarket trading here on Thursday.
Earlier this week, both Microsoft (MSFT) and Alphabet (GOOGL) issued poor reports and dropped sharply, but the broad market handled it surprisingly well. These stocks have been market leaders for many years and have often covered up underlying weakness, but the action on Wednesday was the inverse, with the broad market covering up some of the weakness in big tech.
There was very impressive strength in small-caps, biotechnology and a variety of other sectors early on Wednesday, which was driven in part by strong bonds and news that the Bank of Canada was less hawkish than anticipated. The bounce fizzled out at midday, but breadth remained strong and the weakness in the Nasdaq 100 did not spill over to the other indexes.
This action has many market players scratching their heads. But while the market is holding out more hope that inflation may be cooling and that the Fed may start to pivot, it is growing more concerned that the economy is starting to cool. The widely accepted consensus is that we won't be able to cut inflation until the economy cools, unemployment increases and we are in danger of a recession.
The market is now slowly making the transition from concern about inflation to worry about the overall economy. The big-cap technology stocks illustrate that there is economic slowing already developing. Technology names such as Alphabet and Apple (AAPL) tend to be more sensitive to interest rates than the broad market because they are priced in large part due to discount rates.
The big issue that the market will confront today is whether Amazon (AMZN) and Apple will become leaders again that drive the market. Can the broad market handle a poor response to earnings from these two giants? We will find out tonight.
We also have the third-quarter GDP report today. It is expected to show growth between 2% and 3% after declining in the last two quarters. This increase is mostly due to large fluctuations in inventories and foreign trade and really doesn't reflect that the economy has mostly been flat so far this year. This report will likely see a market response, but we still are waiting for clear data that show the Fed's hawkishness is having an economic impact.
