The NASDAQ Composite has had a nice little run, up more than 9% year-to-date. However, I would exercise caution ahead of Tech earnings and the Fed’s January 31st / February 1st FOMC meeting.
We have written on numerous occasions that we expect management teams to take a conservative approach to 2023 Revenue and EPS guidance. There is no upside rationale for management teams to provide aggressive 2023 guidance. Management teams have limited visibility into the macro demand environment as well as their sales pipelines. Microsoft (MSFT), will be the first such test tomorrow evening after the market close.
With respect to Microsoft, focus on CEO Satya Nadella’s commentary around the Azure and LinkedIn business units. My guess is that Azure will be a mixed bag. On the positive side Azure will continue to take share from the on-premise server market. On the negative side many companies have reduced headcount (or have gone out of business), thus reducing Azure usage. Over the course of 2023 I expect the negative to outweigh the positive. The same goes for Amazon’s (AMZN) AWS unit, Google’s (GOOGL), Cloud Platform and Oracle’s (ORCL), Cloud. Regarding LinkedIn, I expect Ad sales will be weak. Premium subscriptions are likely to be weak as well.
With respect to the Federal Reserve, if I were Chairman Powell I would get the Funds Funds Rate to where it needs to be sooner rather than later and would opt for a 50 BPS increase on February 1st rather than 25 BPS. Historically markets have not found a bottom until AFTER the Fed begins to cut rates. The Fed is not going to cut rates soon as many believe. It simply does not make sense to have come this far only to begin cutting rates within several months. I fail to see the logic in the argument that the Fed will soon cut rates.