Weekly Brief: Earnings Season’s Been Good So Far, But Don’t Forget To Look Ahead

So far, so good for tech’s fourth-quarter earnings – but any investor worth their salt knows you won’t make a buck looking in the rearview mirror, so here’s a peek at the potential road ahead.

🕰 Recap

• Microsoft reported fourth-quarter earnings on Tuesday, and the software giant’s numbers weren’t so shabby
• Then chipmaker ASML posted knockout results on Wednesday, and reminded investors that tech land still has a lot of promise
• And on Thursday, economic data showed that the US economy held its own last quarter, with even prices playing ball

✍️ Connecting The Dots

The last few months have been good for the US and Europe, with their economies holding up stronger than predicted. And sure, it’s only the very start of the reporting season, but better-than-expected fourth-quarter results from last year are rolling in too. Stock investors, then, are positively jubilant – especially compared to the dismal vibe from six months ago. Thing is, investing based on past results won’t get your photo framed in any investing Hall Of Fame. It’s all about the future, so be wary of spending too much time staring in the rearview mirror.

Let’s take a peek out the windshield instead. So far this year, companies’ future-tellers are erring on the cautious side: data analytics firm FactSet estimates that of the S&P 500 firms that have already reported earnings, half warned investors that 2023’s shaping up to be worse than they’d expected. Now, that’s a pretty high proportion. After all, firms prefer to paint a pretty picture of future results, so positive outlooks usually outnumber negative ones by a decent margin.

Mind you, that wasn’t completely unexpected: savvy investors had seen it all coming, and priced in some of that negative commentary before the results came out. So they've shrugged it off – for now. We’ll have to see how the rest of earnings season unfolds: the results may dictate whether the stock market’s recent strong performance actually has legs, or whether folk bring out that ugly “bear market rally” phrase again.

🥡 Takeaways

1. Let’s skip ahead.

Let’s practice that focus-on-the-future thing, and flash forward to 2024. When you’re predicting outcomes for firms’ profit, you’ll want to bear two major potential outcomes in mind. Firstly, profit figures could slump in 2023, even though analysts actually expect them to grow slightly. In that case, 2024 could end up as a bounce-back year. (Remember, while worse-than-expected profit could put markets into reverse in the short term, the post-crisis bounce-back years of 2009 and 2021 were both good ones for stocks.) So if you’re cashed up to the eyeballs, that scenario could give you a decent chance to snap up a few bargains at some point. The second outcome, though, is that 2023 turns out to be plain sailing for profit. In that case, companies will have navigated one of the most challenging couple of years in recent memory with aplomb, and that would warrant a pat on the back too.

2. Tech’s whispering sweet somethings.

Tech firms might’ve had some bad press lately, but there’s plenty of excitement to be found if you look a little deeper. Microsoft’s cloud business might be slowing, sure, but management reckons it’ll still grow around 30% next quarter versus the same time last year. If it slides through the rest of 2023 at that same impressive pace, that’ll work wonders on investors' confidence about the cloud business’s future. On top of that, semiconductor firms ASML, STMicroelectronics, and Texas Instruments boasted some, ahem, electric results in their auto segments: rampant EV sales have been driving demand for chips, and the long-term outlook looks pretty plush there. Add artificial intelligence into the mix, and you might just have the recipe for another tech boom.

🎯 Also On Our Radar

Tesla’s stock price is up a whopping 30% this year, and nearly 50% from its January low. And Elon Musk wasn’t going to let another lawsuit – filed over comments he made about taking Tesla private in 2018 – distract from the car company’s tidy fourth-quarter results. Musk praised price cuts, and said demand so far had been the strongest in the firm’s history.