Stocks Lower Amid Key Labor Report and Corporate Data
U.S. equities declined in a choppy trading session following a stronger-than-expected January labor report and some uninspiring earnings results from mega-cap stocks. Nonfarm payroll additions beat estimates by a large amount, and the unemployment rate declined, solidifying the notion of a tight job market. Meanwhile, a read on domestic services sector activity moved back into expansion territory. Mega-cap stocks were in focus today, as Dow member Apple missed estimates and posted its first quarterly decline in revenues since 2019, Amazon and Alphabet also posted discouraging quarterly results, while Qualcomm bested EPS estimates by a penny, but fell short on the revenue side. Treasury yields and the U.S. dollar were noticeably higher following the labor data, while crude oil prices fell in choppy action, and gold plunged. Asian and European stocks finished mixed, as the markets continued to process the week’s monetary policy decisions, as well as some services sector data across the globe.
The Dow Jones Industrial Average declined 128 points (0.4%) to 33,926, the S&P 500 Index fell 43 points (1.0%) to 4,136, and the Nasdaq Composite fell 194 points (1.6%) to 12,007. In moderate volume, 4.6 billion shares of NYSE-listed stocks were traded, and 5.9 billion shares changed hands on the Nasdaq. WTI crude oil lost $2.49 to $73.39 per barrel. Elsewhere, the gold spot price went down $52.40 to $1,878.40 per ounce, and the Dollar Index soared 1.2% to 102.99. Markets ended mostly higher for the week, as the S&P 500 gained 1.6%, and the Nasdaq Composite climbed 3.3%, while the DJIA dipped 0.2%.
Dow member Apple Inc. (AAPL $155) posted a Q4 profit of $1.88 per share, below the $1.94 FactSet estimate, with revenues falling 5.5% year-over-year (y/y) to $117.15 billion, versus the projected $121.10 billion, marking its first y/y decline in sales since 2019. CEO Tim Cook attributed the lackluster results to the U.S. dollar's strength, iPhone 14 Pro and iPhone 14 Pro Max production problems in China, as well as the overall economic environment. A 6.4% y/y gain in services revenues was more than offset by an 8.2% decline in iPhone sales, and a 29.7% plunge and 28.7% drop in iPad and Mac sales, respectively. As has been the case since 2020, AAPL did not provide any forward guidance. Shares were higher.
Alphabet Inc. (GOOGL $105) reported Q4 earnings-per-share (EPS) of $1.05, falling short of the $1.18 estimate, as revenues rose 1.0% y/y to $76.05 billion, just below the Street's expectation of $76.18 billion. The parent of Google said advertising revenue at YouTube fell 7.8% y/y to $7.96 billion, compared to analysts' forecasts for $8.30 billion, and sales out of its cloud unit also declined and fell short of expectations. GOOGL also said that it plans on taking a charge of between $1.9 billion and $2.3 billion mostly in Q1 2023, related to the 12,000 layoffs it announced in January, as well as $500 million in reduced office space while warning of further real estate write-offs in the future. Shares fell.
Amazon Inc. (AMZN $103) reported adjusted Q4 EPS of $0.03, versus the expected $0.17, with revenues rising 8.6% y/y to $149.20 billion, versus the estimated $145.71 billion. The online retailing behemoth cited dampened consumer spending amid the inflationary environment and rising interest rates. As such, AMZN said it sees revenues for the current quarter within a range of $121 billion to $126 billion, and that it anticipates an unfavorable impact from foreign currency rates, compared to the Street’s forecast of roughly $125 billion. However, AMZN’s CEO said that the company is “encouraged by the continued progress” in lowering retail costs, despite an uncertain economy it faces in the near term. AMZN traded noticeably lower.
Qualcomm Incorporated (QCOM $135) reported fiscal Q1 EPS of $2.37, a penny ahead of the Street’s estimates, on an 11.6% y/y fall in revenues to $9.46 billion, compared to the projected $9.60 billion. Similar to its peers, QCOM continued to struggle amid a challenging environment in the chips space, with sales in its CDMA segment, which includes smartphone and automotive components, down 11% y/y and falling short of estimates. Looking ahead, QCOM said it sees fiscal Q2 EPS within a range of $2.05 and $2.25 on sales between $8.7 billion and $9.5 billion, compared to the FactSet estimates of $2.29 and $9.6 billion, respectively. Shares of QCOM declined.
Q4 earnings season has revved up and of the 251 S&P 500 companies that have reported thus far, about 52% have topped revenue estimates and approximately 70% have exceeded earnings projections, per data compiled by Bloomberg. Results have been mixed, along with guidance as corporations try to determine the ultimate impact of the aggressive Fed monetary policy tightening on the economy and profit margins.
Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Helpless? Recession Risks Abound, how leading indicators continue to point toward further economic weakness, making it difficult and premature to determine whether the labor market can maintain its relative strength. You can follow Liz Ann on Twitter: @LizAnnSonders.
Read all our market commentary on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.
January job growth trounces forecasts, unemployment rate falls
Nonfarm payrolls (chart) jumped by 517,000 jobs month-over-month (m/m) in January, compared to the Bloomberg consensus estimate of a 190,000 rise, while December's figure was upwardly adjusted at an increase of 260,000 from the initial 223,000. Excluding government hiring and firing, private sector payrolls advanced by 443,000, versus the forecasted rise of 190,000, after increasing by 269,000 in December, positively revised from the preliminarily reported 220,000 gain. The labor force participation rate increased to 62.4% from December's unrevised 62.3% figure, where it was expected to remain.
The unemployment rate fell to 3.4%, compared to expectations of an increase to 3.6%. The underemployment rate—including total unemployed and those employed part time for economic reasons, along with people who are marginally attached to the labor force—increased to 6.6% from the prior month's 6.5% rate. Average hourly earnings were up 0.3% m/m, matching expectations and December's reading. Compared to last year, wages were 4.4% higher, above forecasts of a 4.3% increase, and lower than December's upwardly adjusted 4.8% rise. Finally, average weekly hours rose to 34.7 from December's 34.3 rate where it was expected to remain.
The report adds credence to the Federal Open market Committee's (FOMC) statement that accompanied Wednesday's monetary policy decision that noted a still-tight labor market, which along with persistent inflation have been drivers in the FOMC's rate hike campaign. The Fed raised its target for the fed funds rate by 25 basis points (bps), but a continued deceleration from the aggressive pace set in 2022. Schwab's Liz Ann Sonders discusses the decision in her commentary, Waiting for the End…Just Not Yet, noting that though the Fed is close to the end of its rate-hiking cycle, additional increases in the fed funds rate are still likely, albeit less aggressive in magnitude.
The Institute for Supply Management (ISM) Services Index (chart) moved back into expansion territory in January, denoted by a reading above 50. The index rose to 55.2, compared to the Bloomberg consensus estimate of an increase to 50.4 from December's 49.2 reading. The headline figure for the key services sector bounced off its lowest level since May 2020, as business activity and new orders rose solidly, employment nudged higher and out of contraction territory, while prices paid declined to 67.8 from last month's 68.1, a level not seen since January 2021.
The final S&P Global U.S. Manufacturing PMI Index for January was upwardly revised to 46.8 from the preliminary reading of 46.6, versus forecasts for no change, remaining in contraction territory as denoted by a reading below 50, but above December's 44.7 figure.
Treasury rates were noticeably higher, as the yield on the 2-year note climbed 22 bps to 4.31%, the yield on the 10-year note rose 14 bps to 3.53%, and the 30-year bond rate increased 7 bps to 3.63%.
Europe diverging as markets assess data, rate decisions
Stocks in Europe were mixed as the markets digested economic data out of the U.S. and within the region, and process the week's monetary policy decisions. Services sector activity in the Eurozone nudged higher, as data out of Germany, Italy, Spain and France all improved. Meanwhile, Eurozone PPI moderated at a slower-than-expected pace from last month. As well, investors continued to digest yesterday's 50-bp rate hikes by the European Central Bank (ECB) and Bank of England (BoE) that came in the wake of the 25-bp rate increase out of the Fed in the U.S on Wednesday. The euro and British pound were sharply lower versus the U.S. dollar, while bond yields in the Eurozone were mostly higher, and rates in the U.K. increased.
European markets have been rangebound after getting off to a strong start for 2023, as stocks have been buoyed by signs that warmer-than-expected winter weather may help the region avoid an energy crisis, as well as China’s reopening, and expectations that global central bank aggressive tightening may cool off. These positive developments have countered uncertainty regarding the ultimate implications of aggressive monetary policy tightening around the world on the global economy and financial conditions. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest article, The Everything Everywhere All at Once Rally, how despite market volatility, inflationary pressures, and a potential earnings recession, a rally involving stocks, bonds, and some commodities started in November still persists. You can follow Jeff on Twitter: @JeffreyKleintop.
The U.K. FTSE 100 Index was up 1.0%, France's CAC-40 Index gained 0.9%, and Switzerland's Swiss Market Index rose 1.4%, while Germany's DAX Index lost 0.2%, Italy's FTSE MIB Index declined 0.6%, and Spain's IBEX 35 Index was mostly unchanged.
Asia mixed following monetary policy announcements
Stocks in Asia finished mixed with the markets digesting the week's monetary policy decisions out of the U.S., the Eurozone, and the U.K, as well as some data on services activity. Aggressive monetary policy tightening has caused volatility in the currency and bond markets but most markets in the region have seen solid year-to-date gains, led by the Hong Kong markets. The moves have been aided by China’s reopening, the potential for eased regulatory crackdowns on the Technology sector, property market support, and expectations that central banks across the globe, including the Fed in the U.S., may be set to slow down monetary policy tightening. In economic news, the Caixin Services PMI for China surprisingly moved back into expansion territory and above forecasts, while activity in Japan nudged lower, but remained expansionary.
Optimism of China’s reopening has countered uncertainty regarding the ultimate impact of the aggressive monetary policy tightening from most central banks around the world. In his article, Global Outlook: Recovery and Risk, Schwab's Jeffrey Kleintop notes how markets may continue to see volatility in 2023 as they navigate between global economic growth and inflation fears, with central banks' decreasing rate hikes and China's reopening.
Japan's Nikkei 225 Index increased 0.4%, with the yen adding to yesterday's rally versus the U.S. dollar that came in the wake of the Fed's decision. China's Shanghai Composite Index finished 0.7% lower, and the Hong Kong Hang Seng Index tumbled 1.4%. However, Australia's S&P/ASX 200 Index gained 0.6%, India's S&P BSE Sensex 30 Index advanced 1.5%, and South Korea's Kospi Index rose 0.5%.
S&P 500 able to add to yearly gains following busy week
Investors had plenty to sift through this week, as Q4 earnings season revved up and a mountain of economic data and events hit the tape. Labor was a focal point, as the ADP Employment Change report, Job Openings and Labor Turnover Survey (JOLTS), and more moderation in jobless claims preceded the January labor report, solidifying what continues to be a tight labor market. However, it was the monetary policy decision from the Federal Open Market Committee (FOMC) that garnered the lion’s share of attention for the week. The FOMC opted to raise the target for its fed funds rate by 25 bps, a shift down from December’s 50-bp move, and the four 75-bp increases that the FOMC instituted at the pinnacle of this rate hike campaign. As well, in his press conference following the decision, Chairman Powell struck a more dovish stance, indicating that the Central Bank may be near the end of its tightening cycle. In response, Treasury yields fell, with the 10-year note hitting levels not seen since mid-September, and gold rallied. The European Central Bank and the Bank of England followed suit with 50-bp increases of their own. Meanwhile, results from a number of Dow components and mega-cap tech firms hit the tape, offering mixed results and guidance, which has evolved to be a theme this earnings season, as companies attempt to gauge the end results of the aggressive tightening around the globe on their profit margins.
Next week's economic calendar will be far more subdued than this week’s docket, but there are some data points of note, including the December trade balance, consumer credit for last month and the preliminary University of Michigan Consumer Sentiment Index for February. Also on deck is initial jobless claims for the week ended February 4, and the MBA Mortgage Applications Index for the week ended February 3. Some Fedspeak is also scheduled throughout the week, which may garner some scrutiny for additional clues as to the Fed’s path forward.
The international economic calendar for next week will offer some reports that may shape market action, including: China—PPI, CPI, and new yuan loans. Japan—household spending, employment figures, PPI, and the Leading Index. Australia—retail sales, trade balance. Eurozone—retail sales, as well as German factory orders, industrial production, and CPI. U.K.—construction output, Q4 GDP, trade balance, industrial production, and retail sales. In central bank action, monetary policy decisions are expected from the Reserve Bank of Australia and the Reserve Bank of India.
Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.
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