During the peak-Covid years, many people yearned to get back to normal. Now, in terms of corporate earnings at least, it seems we may finally be there, and investors aren’t happy.
While earnings from
Microsoft
(ticker: MSFT) and
Alphabet
(GOOGL) led to big gains for stocks earlier this week, the picture from tech looks more clouded now. Shares of
Amazon.com
(AMZN) and internet infrastructure firm
Cloudflare
(NET) are both falling, hurt in large part by cautious commentary from management that underscored fears about the health of the economy.
Amazon warned that an “uncertain economic environment and ongoing inflationary pressures continue to be a factor, and we believe it’s continuing to drive cautious spending across consumers.” That matched up with commentary from
United Parcel Service
(UPS) and Packing Corp. (PKG) about shoppers pulling back.
It isn’t just consumers who are feeling the pinch, though. Amazon said the businesses that use Amazon Web Services were also looking for cost savings as they “continue to evaluate ways to optimize their cloud spending in response to these tough economic conditions in the first quarter.”
Amazon itself is cutting back as well, as evidenced by its latest round of layoffs.
Cloudflare’s commentary was equally negative. CEO Matthew Prince talked about clients’ escalating concerns over bank failures, saying that the their sudden shift was most reminiscent of the “first quarter of 2020, when businesses were paralyzingly nervous about the impact of Covid.”
“I think this parallel shows how, with uncertainty in the economy, companies are closely watching their own businesses before committing to new spending,” he said.
Peter Boockvar, chief investment officer at Bleakley Advisory Group, noted that level of concern in a report arguing that just as people think of the world in terms of before and after the pandemic, “the economy in 2023 has two parts.”
“One pre
SVB Financial
(SIVBQ) and one post SVB,” he said in a research note.
It is clear in the market as a whole that concerns are mounting as result of the tremors in banking, Boockvar said. Much as Barron’s has reported, this year’s rally rests on a razor-thin sliver of companies.
Through Wednesday, the S&P 500’s year-to-date gain of 5.1% was a function of the 5.6% contribution of its top eight stocks—
Meta Platforms
(META),
Apple
(AAPL), Amazon,
Netflix
(NFLX), Alphabet, Microsoft,
Nvidia
(NVDA) and
Tesla
(TSLA). “Thus, the other 492 stocks were a drag of 0.44% in return,” he wrote.
Given that consumer spending accounts for the lion’s share of the U.S. economy, it’s easy to see why signs that Americans are tapped out by the rising cost of living have rattled such a wide swath of the market. Remarks from the likes of Amazon that the pressure will continue hardly help.
The cracks were obvious even before earnings season began. As Barron’s noted last month, delinquencies in mortgages, auto loans, and credit cards have been edging toward prepandemic levels, a trend that looks poised to accelerate.
Boockvar pointed to a worrisome outlook from
Capital One Financial
(COF). The company said that “across our businesses, credit trends continued to normalize in the quarter, and we reached or were approaching pre-pandemic levels at quarter end.” It said it was braced for higher unemployment and lingering inflation, which could lead to “further worsening of consumer profiles from the sort of flip side of their extraordinary outperformance in the earlier period during the pandemic.”
“So far in all the earnings reports, ‘normalize’ and ‘optimize’ are code words for ‘weaker’ and/or ‘softer,’” Boockvar said.
So much for the good old days.
Write to Teresa Rivas at teresa.rivas@barrons.com
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