Major technology companies reported earnings this week, overshadowing concerns around Federal Reserve policy and economic data. While markets treaded water ahead of the Fed announcement, stocks could face volatility based on tech giants’ results.
Microsoft Tops Expectations
Microsoft kicked off earnings season for big tech companies on a high note Tuesday, beating profit and revenue expectations. The software firm reported better-than-expected earnings of $2.32 per share on revenue of $52.75 billion.
The results were driven by growth in its cloud computing business, Azure, as more companies transition operations online. Azure revenue jumped 31%, continuing a hot streak of growth. Microsoft’s earnings helped extend the recent rally in stocks, with the Dow Jones adding to its fourth straight record close.
|Azure Revenue Growth
While Microsoft edged out expectations, analysts noted room for caution around slowing growth rates across business segments. Margin pressures also remain a concern amid a murky economic outlook. Nonetheless, the report buoyed hopes for upcoming tech releases.
Eyes Turn to Other Tech Giants
With Microsoft setting the pace, attention shifts to earnings from Apple, Amazon, Meta, Alphabet and other tech leaders later this week. Their reports will hold heavy influence over market sentiment, given the sector’s hefty weighting in major indexes.
Mega-cap tech stocks have faced pressure recently amid rising rates and worries over softening consumer demand. However, analysts still expect strong results from industry juggernauts. The tech sector overall is seen posting earnings growth of 5.5% this quarter.
Companies like Apple and Amazon in particular should drive solid growth for the S&P 500, according to forecasts. Amazon likely benefited from resilient e-commerce sales over the holidays, while Apple’s iPhone 14 series continues gaining share globally.
Meanwhile, Alphabet and Meta aim to show progress on cost cuts after laying off thousands of employees. Their ability to demonstrate expense discipline could improve negative market narratives.
On the other hand, companies seeing slowing ad sales or cloud growth might spook investors. Analysts warned that tech firms face a high bar to impress markets, given lofty valuations across the sector.
Fed Decision Also on Radar
Beyond earnings, markets still have the Federal Reserve’s rate decision and press conference to contend with on Wednesday. The Fed is universally expected to raise interest rates by 25 basis points, bringing the target range to 4.5-4.75%.
The key question is whether Fed Chair Jerome Powell signals an end to the hiking cycle or leaves the door open for further increases. Markets could see increased volatility around the announcement as investors reposition based on updated rate projections.
Most analysts believe the Fed will sound less hawkish compared to December given cooling inflation. However, Powell will likely stress the need to remain data-dependent when considering pausing rate hikes. An overly dovish stance risks undermining recent progress on inflation.
Beyond Wednesday, Friday’s jobs report presents another wildcard. Economists expect the U.S. economy added 187,000 jobs in January, marking a slowdown from previous months. An upside surprise on job gains could bolster the case for higher rates.
Outlook Hinges on Growth Trajectory
As the Fed asserts control over inflation, markets turned their focus to signs of an economic recession. Data this week showed consumer confidence rebounding in January, easing some slowdown fears. However, business investment remains under pressure from higher borrowing costs.
Most analysts believe the U.S. can avoid an acute downturn, instead experiencing below-trend 1-2% GDP growth. But tech giants’ guidance will provide critical glimpses into corporate health. An erosion of demand across cloud, advertising and e-commerce would ring recession alarm bells.
On the other hand, resilience among mega-cap tech firms would reinforce hopes for a soft landing. Their outsized influence means growth trends in big tech often foreshadow broader economic moves. Markets are likely to remain fixated on tech even as the Fed asserts policy dominance in the near term.
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