By Alex Tapscott
Last Wednesday, The Federal Reserve announced a ¼ point interest rate hike, in-line with market expectations. Jerome Powell warned that inflation could remain elevated, which could justify further increases but acknowledged a marked slowdown overall. While hardly a “Mission Accomplished” the softer tone was cheered by investors who responded by pushing stocks higher for a fifth consecutive week. A strong jobs report on Friday threw some cold water on the rally, but despite a late week sell-off the NASDAQ still posted a more than 3% gain. As we wrote last week, Bitcoin has had a stellar start to the year, broadly in-line with other risk assets.
I shared my thoughts on the Fed impact on the market and Big Tech earnings on Bloomberg TV recently- you can check that out here: Alex Tapscott on Bloomberg TV.
Why the change in sentiment? The market has been pricing in a worst-case scenario for the past 6 months. The base case for most investors going into 2023 was that inflation was out of control, the Fed would need to keep hiking and the economy would implode (or at least have a recession) So far, the data does not support that view and the Fed has softened its tone. While we are not out of the woods, the worst case is no longer the base case and that's being priced in.
This Tuesday, Powell took the stage again at the Economic Club. The message this time was more muddled. He pointed out that inflation was pandemic-induced, boosting bets that it will be transitory overall. But he also said strong labour number would require more rate hikes.
Big Tech Earnings Give a Boost to the Market
Big tech earnings were mediocre, but not disastrous. Facebook beat on earnings and revenue (benefiting from exceptionally low expectations). Apple, Google, Microsoft and Amazon were a mixed bag. For the market as a whole, earnings are down 20% on a year over year basis, which has had some pundits calling this an ‘earnings recession’ but the numbers are being compared to Q4/2021 which was a goldilocks zone of high growth, pent up demand for services and goods (deferred from COVID), strong business spending and moderate inflation. So, the year over year comparison may not be helpful. So far, staving off a disaster is enough.
Speaking of earnings, we heard a lot on the earnings calls about cost cutting and belt tightening. We've seen it already in the job cuts to big tech and pledges to reduce headcount further if needed. In a zero-interest rate environment, investor reward growth at all costs. Now, they are rewarding profitability.
For equity investors, we are now in a “bottom line market" not a "top line market" meaning investors will reward management teams that can rein in costs and drive profits.
Web3, AI, and The Metaverse: The Three Horsemen of the FANG Apocalypse?
If macro conditions improve and these companies can execute on cost saving measures, I'm guessing the market will reward them and the stocks could do well short-medium term. But, bigger picture, we are also at a fascinating transitional moment in tech.
To wit, three new technology trends could transform the technology industry and our world: artificial intelligence, Web3, and the metaverse. This year will probably be the year of AI and machine learning, if the past 6 weeks is any guide. OpenAI’s natural language chatbot ChatGPT has grown to 200 million users in 2 months, the fastest adoption ever for an internet application. The explosive success of OpenAI has clearly caught the attention of investors and management teams at the big firms are responding. Just look at the earnings calls from this quarter: On the Microsoft earnings call, AI was mentioned 30 times. On the META call it was mentioned 37 times. And on the Google call, AI was mentioned a staggering 67 times! Google Executives are must be quaking in their Allbirds.
Now, these companies could find ways to harness these new technologies or they may find themselves the focus of disruption. Microsoft is probably best positioned in all three categories of AI, metaverse and Web3. But there is no guarantee they can steward these rough and uncertain seas of change. These tech giants have dominated their respective industries for so long that we assume their positions are unassailable when in fact history teaches us that the only constant is change.
