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Capital 19 Catch-Up

Weekly Index Movement

S&P500 -8.8%

Nasdaq -13.4%

Aussie All Ords -0.8%

Just when I was thinking things couldn’t get any worse for US equities – they do. Friday’s session was brutal, it started weak and sustained selling saw the indexes close on their lows.

Not only did the S&P 500 finish the month down 8.8%, the biggest one-month decline since March 2020, but the last trading day of the month was the second-worst end to a month ever!

The S&P 500 has now declined at least 1% for four straight weeks while the Nasdaq has been down at least 2.5% for four straight weeks.

When the markets start acting like this, it’s incredibly difficult to make any sense of the day to day moves, so for us or anyone to say anything about what to expect in the short-term would be foolish.

But are things looking better on a long-term basis?

SP500 Earnings

Based on Wall Street analysts’ current 12-month (Q2 2022 – Q1 2023) forward earnings expectations of $236/share for the S&P 500, the index trades for 17.5x future earnings. As the chart shows, that’s the lowest multiple since the pandemic crisis. It is also right in between the 5- and 10-year averages (the green and blue dotted lines).

Whilst this isn’t cheap, it isn’t expensive either.

I would suggest, even though stock prices have fallen considerably, they still have room to move even lower. Particularly in the short-term. But prices any lower than present do mark a nice long-term buying point.

What would I look to buy?

Energy is still my favourite sector right now.

Energy has been significantly outperforming Tech since the start of 2022 and whilst prices for Energy companies might look high right now, I believe there is still a lot of room for them to move

That small grey box at the far right of this graph is the period shown in the first graph.

As you can see, the Energy-Tech battle has tended to move in some really long-term trends, so if the tide really has turned, there’s likely more outperformance left in Energy in the years ahead.

Big Tech Earnings

We had a lot of Big Tech earnings calls to listen to last week. Here are the main talking points.

Amazon (AMZN)

Amazon shares traded down 14% the day after reporting results that were worse than expected. AMZN reported a net loss of $3.8 billion in Q1 versus analyst expectations of +$4.4 billion of net earnings. The investment in Rivian (RIVN) acted as a $7.6 billion headwind to bottom line earnings. Revenue came in slightly higher than expected, but the y/y revenue growth rate was the lowest since the dot-com bubble burst. The causal factor behind the dramatic selloff was the company’s Q2 guidance, which was notably weak relative to estimates. The tough backdrop for AMZN can be attributed to inflationary pressures, supply chain constraints and lapsing benefits of pandemic-induced trends.

Apple (AAPL)

Apple posted a beat on EPS driven by stronger revenues, but guidance was relatively weak, which led to the stock falling 3.7%. They pulled next quarter’s revenue guidance due to uncertainty around the world.

On a positive note for the macro environment, Cook stated that supply chain issues were “significantly lower” than they were in the December quarter before China began shutting down cities again. However, constraints do remain, particularly due to silicon shortages and legacy nodes.

Cook added that the supply chain constraints will pose a headwind of $4 billion to $8 billion in Q3. This is “primarily centered around the Shanghai corridor.” but add that he is “encouraged that the COVID case count… in Shanghai has decreased over the last few days… so there’s some reason for optimism there.”

All-in-all, this was a relatively mixed print for AAPL. Although demand remains strong and the company has taken efforts to mitigate supply chain constraints and inflationary pressures, this quarter did not encompass much of a period in which China (particularly Shanghai) was shutdown, so the next quarter will likely encompass these additional headwinds. The biggest supply chain headwind is in “final assembly factories,” but many of these factories have “now restarted”.

Microsoft (MSFT)

MSFT narrowly beat on both the top and bottom line while providing strong guidance. CEO Satya Nadella believes that “Going forward, digital technology will be the key input that powers the world’s economic output.”

Management was bullish on the overall tech space, as Nadella projects that tech spend “As a percentage of GDP is, by the end of the decade, going to double.” In order to capitalise on this opportunity, MSFT is focusing on “driving usage and share.” MSFT’s guidance was strong, as management views the current macro environment as a positive for the business, as corporations across the world are looking to enhance efficiencies and migrate to the cloud.

Microsoft shares gained 4.8% on the announcement.

Alphabet (GOOG)

GOOGL missed on EPS on inline revenues, even as operating margins came in ahead of expectations. Ad revenue, cloud revenue and other bets beat expectations, while services and other revenues missed and cloud posted a larger operating loss than expected. The stock price fell 3.7% on the news

CEO Sundar Pichai provided insights into the return to the office, stating: “Even as more people return to in-person activities, we are seeing hybrid approaches to learning and working are here to stay, and our products are helping partners seize these new opportunities.”

Pichai views “the living room” as an area of opportunity. Through newly launched features, “YouTube Connected TV viewers [can] comment and share content they are watching… directly from their devices.” Over the next few years, GOOGL aims to “invest in new form factors, seamless multi-device experiences” and improve user privacy.

The company launched multi-search this quarter, which is “a new way people can find what they need using both images and words,” as per Pichai. The company also rolled out a feature that allows people to search for health care providers that accept their insurance.

GOOGL’s operating model focuses on “building a great user experience first, and to build monetization over time,” as stated by Pichai. In accordance with this strategy, management has altered their fee structure for content creators, resulting in lower expected receivables for GOOGL but higher rates of content creation, which should attract users to the platform and allow for improved monetisation in the long run. All-in-all, GOOGL is leading in technological developments in several verticals within the technology space, and the developments underway are truly fascinating. Although this print was underwhelming to investors, the innovations taking place at GOOGL must be factored into the valuation.

Meta Platforms (FB)

Meta Platforms (FB) derives the vast majority of revenues from ads on its social media platforms (i.e. Facebook and Instagram). However, two quarters ago, the company announced plans for $10 billion in annual spending to develop the metaverse and changed its name to reflect the shift in the strategic focus of the company.

Horizon, FB’s metaverse platform, will launch through a web version “later this year,” according to Zuckerberg.

Last quarter, daily active users (DAUs) declined sequentially, but stability in this metric this quarter was a relief to investors.

FB beat on EPS but missed on revenues, while delivering guidance that was weaker than expected. However, shares popped over 14%, probably because trading on a PE of 13, as it was, was far too low for a company like Meta.

The Coming Week

After a brutal month for equity investors in April, May is kicking off with a host of major market events that could further stoke volatility across risk assets.

One of the focal points this week will be the Federal Reserve’s May monetary policy meeting, which will take place Tuesday and Wednesday. Market participants expect at the conclusion of this meeting, central bank officials will opt to raise interest rates by 50 basis points following the 25 basis point rise at the last meeting.

On Friday we will get employment numbers which are tipped to show a gain of +390,000

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.

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