A Thousand Cuts

By Aoifinn Devitt, Chief Global Investment Strategist

While the jobs numbers last week led to euphoria in markets, this week saw a little bit of buyers’ remorse – albeit selective. Earnings are on a positive roll – with over 50% of earnings now in, the majority have reported positive EPS surprise and over 65% of S&P 500 companies reported a positive revenue surprise.  Microsoft, Qualcomm and Intel have been some leading lights among tech stocks, leading to the ongoing positive momentum in that sector.

As the chart below shows, markets remain broadly positive against a backdrop of earnings season punctuated by news from election primaries.

Source: Morningstar as of 2/8/24

Not all tech stocks are benefiting from this rising tide however – SNAP was punished by markets mid-week despite beating Q4 numbers on subscriber growth and acquisition costs, because its forecasts were lackluster. It turns out that, for social media companies, privacy hurts.  The increased attention to privacy by companies such as Apple are making those annoying targeted ads more challenging for companies like SNAP and Meta that depend on advertising revenue.  A steady drip-feed of challenges has come home to roost for this company – and it is not alone.

Last week we mentioned the stunning $552 million loss provision taken by New York Community Bancorp relating to its commercial property exposure.  This had a chilling effect on the stock and ultimately Moody’s downgraded the company to junk earlier this week, prompting a scramble to shore up confidence.  Despite a vow by the CEO to do “whatever it takes” to build up its capital ratios, the stock fell 22% in one day on Tuesday. This is sure to stoke fears of other banks similarly exposed to commercial real estate, and the departure of two key executives at NYCB – including Chief Risk Officer – just underscores the complexity and enormity of the task of managing risk in a bank during what has been described as a “transitional” year.

The shifting rate backdrop introduces yet another transition into the horizon – the inevitable transition to interest rate cuts – timing still uncertain.  However, it is important to remember that companies and consumers are still wrestling with the lagged effect of the cycle of rate hikes, which have not to date fully worked their way through the economy.  Snap’s travails also illustrate how much else is “transitional”. Social media innovations are in a state of constant change – while our attention spans shorten, so too do product cycles. It does not take much for investors to “swipe left” when it comes to former tech stock darlings (c.f. Tesla, which is now down 20% in the past month). Let’s see what next week and Valentine’s Day bring in terms of the current tech stock love story.



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