After two days of markets being led higher by tech stocks, titans Apple, Amazon and Google owner Alphabet all delivered disappointing earnings that showed economic reality is less than rosy.
Three of the world's largest companies falling short of Wall Street estimates confirmed the impact of declining consumer confidence amid a slowing US economy and a global outlook that remains highly uncertain.
Following a 3.3% surge in the Nasdaq on Thursday taking its gains to over 5% for the first two days of the month, shares in the titanic trio all fell in after-hours trading, Amazon dropping over 5%, Alphabet 4% and Apple 3%, which is likely to ensure US stock markets are due to head lower when trading opens on Friday.
Apple Inc (NASDAQ:AAPL) blamed its disappointing earnings on supply issues and other factors outside of its control, but analysts largely reject this.
Finalto analyst Neil Wilson said: “This was a very weak report from Apple and it’s hard to see how they can blame it all on external factors like the dollar and China’s lockdowns hitting production.
“There is clearly a demand problem here, as consumers dial back spend,” he added.
For Apple and rivals the ongoing challenge remains of getting users who are tightening their belts to upgrade with what is perceived to be incremental improvements on previous models, said Paolo Pescatore, analyst at PP Foresight.
“Everything is heading in the wrong direction for consumer electronic providers,” he said.
While Apple is “in a challenging spot,” said analyst Sophie Lund-Yates at Hargreaves Lansdown, the share price losses were reasonably muted given the circumstances, which is likely to do with “the ongoing belief in the power of Apple’s brand and services”.
Amazon.com Inc (NASDAQ:AMZN), meanwhile, posted its first annual loss since 2014, with its AWS cloud arm coming up short of expectations - a worrying scenario given its position as a key driver of growth, said Wilson.
Amazon’s shares fell most, said Russ Mould at AJ Bell, “as its results contained the biggest worry. Cloud computing has been the growth driver for profits in the business and news of softer demand is a concern.
“The company talked about customers cutting their budgets and trying to find ways to trim spending in cloud services. That suggests a difficult period ahead for the group as its fortunes are judged much more these days on cloud activity rather than retail.”
Regardless of AWS making a profit, it was “not enough,” Lund-Yates suggested: “Amazon’s retail operation grew too fast after the pandemic-boom and volumes weren’t there to meet the new infrastructure,” she said, “all the cloud magic in the world can’t distract investors from that truth.”
Pescatore said although Amazon's cloud rivals are also seeing lower growth, “AWS has more to lose as the market leader,” he said, with the retail business equally of concern.
“Worryingly this is typically Amazon’s biggest quarter due to the holiday season. Unfortunately, the company made some big bets and is now paying the price. It will take time to pivot back to growth. Expect no easing up on efficiency, coupled with price rise to improve margins.”
Alphabet Inc (NASDAQ:GOOG), which owns Google, also showed signs of weakness as it missed both profit and revenue estimates, largely down to lower ad revenue from subsidiary YouTube.
Its laying off of some 12,000 employees early this year is set to bite too, suggested CMC Markets analyst Michael Hewson, as Alphabet looks poised to pay out US$2.3bn in severance.
A slowdown in consumer spending seems to have hit all three companies, reflecting issues seen within the wider tech industry after it saw rapid growth during the pandemic.
Higher costs have also played a part, after inflation grew across the board last year, leading to the sacking of some 87,000 tech sector employees already in 2023, as per website layoffs.fyi.
UBS chief investment officer Mark Haefele said his team “continue to see near-term headwinds to markets despite the latest rebound. But we recognize that some parts of the market will reach inflection points before others”.
In equities, UBS has a “least preferred” stance on US equities and the technology sector, instead preferring “emerging markets including China, as well as German equities, which we expect to be among the main early beneficiaries of China’s reopening and an inflection point in global growth in 2023”.
Goldman Sachs (NYSE:GS) remained convinced of the attractions of Amazon and Alphabet, reiterating 'buy' ratings on both.
Amazon still offers a "multi-year operating income margin expansion story" on the back of improved eCommerce margins, lower international losses and higher profit margin mix contribution from AWS and advertising, while Alphabet shares could remain sluggish in the coming months but "we still remain constructive on the mix of Alphabet’s businesses and their operating profile in the coming years".