Swissquote: Strong earnings, fragile conviction
By Ipek Ozkardeskaya, Senior Analyst, Swissquote
Earnings are coming in strong, but the reaction at the index level fails to match that enthusiasm.
SpaceX jumped 7.80% on a nearly tenfold increase in its AI revenue, while Tesla rallied 3.40% on talk of a potential SpaceX–Tesla merger (suggesting that investors see value in combining the two companies). The Philadelphia Semiconductor Index recovered nearly 2%, and the Nasdaq 100 rebounded more than 1%.
After the bell, Meta beat expectations, reported a much smaller cash burn (negative $2.12 billion in free cash flow versus an expected $8.5 billion outflow), and raised the lower end of its capital expenditure guidance from $130–145 billion to $135–145 billion.
I thought it was a smart move to manage investors’ nerves: on the one hand, the company wants to spend more because cutting spending could have terrible consequences for sentiment when it is so deeply invested in its AI ambitions.
On the other hand, it doesn’t plan to spend more than the ceiling it announced earlier. Now, we don’t know exactly how much of that spending is turning into revenue—as Meta doesn’t rent out compute capacity like Microsoft Azure or Amazon Web Services do—but the numbers show that ad impressions grew more slowly than before, while the average price per ad rose 14%. This suggests that AI tools are helping improve targeting and supporting higher ad prices.
The knee-jerk reaction to Meta’s earnings (I find the name ‘Meta’ so ironic as the company is transitioning into something completely different) was positive: the share price rose more than 7% in after-hours trading before retreating to finish around 2% higher. It is now back around yesterday’s closing level in premarket trading. So Meta’s beat looks set to lead to a neutral market reaction—at least not a negative one, though!
Elsewhere, Tesla dropped more than 3% in after-hours trading after cutting its spending forecast.
IBM rose AH after beating earnings and revenue expectations, helped by software growth and the closing of previously delayed deals.
Wrapping up, earnings are coming in stronger than expected, triggering positive knee-jerk reactions. Yet gains are either rapidly given back or fail to snowball into broader, lasting enthusiasm. Nasdaq futures are down this morning—and leading losses—despite strong tech results announced in the last few hours, suggesting that even strong earnings may no longer help investors overlook troubles elsewhere.
What troubles?
- Crude oil fluctuates on news from the Middle East and Ukraine. Some headlines raise hopes, but most point to continued fighting and supply disruptions. Brent trades around $110 per barrel this morning, keeping fears of higher inflation alive among investors in risk assets.
- The spread between French and German 10-year yields spiked to nearly 160 basis points—back towards levels seen during the sovereign debt crisis in 2011/2012. Italian, Spanish and Portuguese yield spreads over Germany are also widening as tensions and protests spread to other highly indebted European countries.
- Credit stress across AI is mounting, with five-year CDS spreads spiking for both smaller and larger AI players.
Today, Western Digital will announce its earnings. After that, most of this week’s major tech earnings announcements will be over, leaving investors time to digest the news before the next round—including Microsoft, Alphabet, Amazon and Sandisk next week.
Where to go?
Rotation out of tech will likely continue, yet elevated energy prices and rising yields could cap gains in non-tech sectors, depending on their sensitivity to interest rates.
In this context:
- Technology still has the biggest rebound potential, as AI remains a major driver and investors are more eager to throw money at projects generating plenty of buzz. But the cost of delivering that growth is being questioned, as companies involved in the AI buildout increasingly rely on debt to continue growing—and that rings the alarm bell louder by the day.
- Defensive and value names could be an interesting place to hide for investors looking to navigate the earnings season. But careful geographical selection is necessary. France’s Carrefour, for example—which is generally considered a defensive stock because people continue buying food and household essentials even when the economy slows—warned that social unrest would weigh on its earnings this year and cut its profit outlook. The shares tanked as much as 15% yesterday.
- Longer-maturity US Treasuries, including inflation-protected securities, look interesting. However, volatility is likely to remain high as the market becomes more dependent on price-sensitive private investors and hedge funds, with central banks providing less support. Pension funds remain important buyers, but their demand is driven by liabilities and sensitive to yields.
- Gold keeps pushing lower, while higher US Treasury yields offer investors an increasingly attractive alternative. Although gold doesn’t look appetising in the short run, accumulating the yellow metal as prices fall could be interesting for longer-term investors, as structurally higher inflation, persistent geopolitical uncertainty and official-sector diversification away from dollar assets support the medium- to long-term outlook.