The stock market has entered a correction territory this fall, with some sectors dropping as much as 20% as investors worry about inflation and more interest rate hikes from the Federal Reserve. In the middle of earnings season, Fed Chair Jay Powell signaled that the Federal Reserve was done raising, and we got several key pieces of data that inflation has peaked.
That was all the market needed to stage a rally during the week of Halloween, as investors saw a better environment and some solid earnings reports in a very oversold market. Several Magnificent Seven, Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla, reported very positive numbers for the third quarter. There were a few stumbles, and we are still awaiting the quarter from Nvidia.
These seven stocks are driving the market up or down, as they represent a sizable fraction of the entire market cap of the S&P 500. For anyone following the market, or stocks in any sector, knowing the direction of these seven will partially inform decision making for just about any stock trade in the entire market.
Apple has maintained a strong performance with $90.15 billion in revenue, highlighting consistent product demand. Its services sector has notably contributed $19.19 billion. Despite a minor dip in net income to $20.72 billion, Apple has balanced innovation and shareholder returns.
The iPhone continues to be Apple’s primary revenue driver, with $42.63 billion in sales this quarter. Apple’s ecosystem strategy has effectively boosted customer loyalty and stabilized revenue through hardware sales cycle fluctuations.
However, the company is cautious about rising production and logistics costs as it aims to sustain innovation and command premium pricing. Forward guidance was a little softer than most analysts had expected, which led to a decline in the stock price immediately following the reports. But as analysts had time to digest the information over the next few days, the price rallied back to about $176, where it had been before the report.
Amazon has grown from an online bookstore to a dominant e-commerce force, surpassing $386 billion in revenue. Its adaptability and customer-centric approach have kept it at the forefront. AWS has been particularly successful, bringing in over $62 billion. Amazon's operational efficiency and diversification, including a burgeoning advertising business, affirm its commercial and technological leadership.
Guidance was very strong, outpacing even the most bullish analyst's expectation, and the stock price popped about 10% during the end of the call when CEO Andy Jassy laid out his plans and expectations for the fourth quarter and 2024. Expect Amazon, especially its AWS, to put up some big growth numbers going forward.
Alphabet (Google) reported a 6% increase in revenue to $69 billion, with advertising bringing in $54.48 billion despite economic challenges. Costs surged by 19%, impacting margins, and operating income fell to $18.69 billion. Alphabet’s expansion into cloud services, hardware, and autonomous vehicles signifies its tech ecosystem growth.
Still, the company faces regulatory and user privacy concerns moving forward. Coupled with some weaker than expected guidance, this was one of the few disappointments among the seven. The company faces challenges and stiff competition from Microsoft, which appears to have the upper hand in cloud computing growth.
Microsoft reported a monster quarter, with Azure cloud services leading its performance. The company's diversification strategy includes steady income from its Office Suite and Windows, ventures into gaming, artificial intelligence, and machine learning, and even recurring revenue streams from platforms such as LinkedIn.
Microsoft's financial health has remained strong due to its ability to adapt and grow, with significant cloud revenues indicating a successful transition from traditional software to cloud solutions.
Tesla faced a 37% dip in adjusted profits and a reduction in operating income to $1.76 billion due to production challenges and increasing competition. Vehicle production decreased due to factory upgrades, and revenue grew 9% to $23.35 billion, below expectations. Tesla’s operating margin shrank and its average selling price declined, reflecting the competitive EV market's impact and new project costs.
The third quarter saw Tesla grappling with production challenges; the company produced approximately 430,000 vehicles, a reduction from the 480,000 produced in the previous quarter. This decline was attributed to planned shutdowns for factory upgrades, which are necessary for long-term growth but have short-term impacts on production and deliveries.
Despite these obstacles, Tesla's revenue saw a 9% increase to $23.35 billion. However, this figure fell short of the anticipated $24.3 billion, signaling that while the company is growing, it's at a pace below expectations. The operating margin reduced to 7.6% from the 17.2% reported in the same quarter of the previous year, evidencing the squeeze on profitability amidst aggressive pricing strategies and cost escalations.
Mercurial CEO Elon Musk gave some very downbeat concerns about Tesla’s challenges and difficulties in ramping up production of its Cybertruck. The stock wavered and dropped almost 10% at one point. But many analysts and investors now seem immune to Musk’s doom and gloom warnings, as historically, they have turned out to be much less severe than initially feared.
Meta Platforms (Facebook) saw a 4% decline in revenue to $27.71 billion and a 52% decrease in net income to $4.4 billion, largely due to investments in its metaverse projects and a contracting digital advertising market. Despite financial pressures, daily active users grew to 1.98 billion. Investors remain cautious as Meta balances its established advertising business with emerging virtual technology investments.
A major disappointment for Meta was comments from CEO Mark Zuckerberg that their massive investments in creating the Metaverse are much further from paying off as many investors were expecting. Going forward, there will be a ton of pressure on Zuck and company to deliver on its promises regarding the metaverse.
Nvidia, known for its GPUs, has yet to report third-quarter earnings but has shown resilience with $6.7 billion in second-quarter revenue. The company’s technology is central to gaming, data centers, and AI, keeping demand high even amidst global economic challenges. Investors expect Nvidia to continue playing a pivotal role in tech, eagerly awaiting the third-quarter report to assess market challenges and growth strategies.
Reports show that the government will disallow almost five billion dollars of advanced chip orders set to go to China amid national security concerns. While their cutting-edge technology and strategic partnerships position them at the forefront of the AI and machine learning revolution, it remains to be seen how much this setback will cost them.
In conclusion, the third-quarter performance of the Magnificent Seven underscores their significant influence on the broader market. As major players within the S&P 500, their collective movements indicate the direction of market trends. Investors closely watch these companies and understand that their trajectory will offer valuable insights into the health of the stock market and the economy.