
03 Feb 3rd February 2025
Index Movement Last Week
S&P500 | -1.0% |
Nasdaq | -1.4% |
Aussie All Ords | +1.5% |
At the time of writing this, President Trump has just announced tariffs against Canada, Mexico and China.
Markets will not respond well to this. Expect to see some selling this week. But let’s dig into it and decide if we should join everyone else and also sell.
President Trump is simply doing what he promised on the campaign trail. He even did it on the self-imposed February 1st deadline. No-one should be surprised by this news. Including companies that it impacts.
CEO’s would have been aware of this possibility for some time and will have stock piled goods in warehouses in anticipation. Yes, these stockpiles will only last a couple of months, but it means we likely won’t see any real impact for some time.
And just what might that impact be? Remember we are talking about the US stock market, not the Canadian market. Any company that imports goods from Canada (correction, certain goods) will need to pay 25% tax to the US government. So it becomes a revenue stream for the US government.
Trump’s hope is that those importers will elect to source the goods inside America rather than from Canada.
For example, they could use Alaskan timber rather than Canada timber. That generates more sales for US companies. But, of course, the reason they were using Canadian timber instead is because it is cheaper. Timber will become more expensive now and those costs will be passed down the chain to the consumer leading to inflation.
Or, the importer will continue to buy from Canada and pay the US government 25% in tax to do so. To afford this, they will raise prices so the end effect is the same.
Whichever way you look at it, this move is inflationary.
Trump would have known this, which is probably why he has Elon Musk running DOGE. By cutting government spend he is taking funds out of the system, effectively reducing inflation.
Just how much one offsets the other is yet to be seen.
But what difference does this make on a company like Microsoft (MSFT)? Yes they do some sales in Canada who will likely respond, but Canadian tarrifs are not going to be a problem for the likes of Big Tech.
Of course, Mr Market won’t think this immediately and will just sell everything on Monday.
Which is, of course, a buying opportunity for us.
To believe you should be a seller here you must believe these tariffs are likely to push the economy into recession. GDP numbers out last week at +2.3% and the fact 81% of companies have exceeded earnings expectations so far say a recession is highly unlikely.
So, whilst we might get a bit of excitement for a few days, you should be looking to buy not sell here.
Microsoft Earnings
Microsoft announced earnings last week and the stock dropped 6% on the news. It will likely fall again on the tariff news but when you look under the hood, it is hard not to be a buyer here.
The highlights……..
- Revenue grew 12% yoy
- Gross margin was 69%
- Operating margin was 45%
- Earnings grew 12%
Going deeper in segment breakdown
- Server and cloud +21% yoy
- M365 commercial products +13% yoy
- Gaming -7% yoy
- LinkedIn +9% yoy
- Windows +3% yoy
- Advertising +12% yoy
- Enterprise and Partner -1% yoy
- Dynamics +15%
- M365 consumer +8% yoy
What is there not to like here? Yet another year of consistent double digit growth
Buy it this week while it is down.
META
Meta smashed earnings again.
- Daily Active users +5% yoy
- Average Revenue per Person +16% yoy
- Ad impressions +6% yoy
- Average price per ad +16% yoy
The Financials
- Revenue +21% yoy
- Operating margin +48%
Everywhere you look you find Social Media and META is your primary way to profit from it.
Make META one of your core holdings too and buy while it is down this week.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.