Stocks fell this morning as the market awaited Big Tech earnings, due out over the next few sessions. The Dow, S&P, and Nasdaq Composite all tumbled, led lower by plunging tech shares. Treasury yields, meanwhile, retreated slightly.
Trading got off to a bearish start today after First Republic Bank (NYSE: FRC) and UBS (NYSE: UBS) reported troubling quarterly results. FRC revealed a stunning 40% drop in deposits last quarter opposite a large debt load. The bank is set to pay 5% on roughly $100 billion in “emergency loans” it received in March, which should virtually zero out the bank’s interest income for several years.
UBS shares plummeted, too, on news that net annual profits were halved (-52%) in Q1. Revenues dropped substantially ($8.75 billion vs. $9.38 billion last year) while operating expenses increased ($7.2 billion vs. $6.6 billion last year). The bank attracted a significant number of wealthy clients, however, as it began its acquisition of Credit Suisse. But overall, it was an unexpectedly difficult quarter for the bank.
This translated into an industry-wide selloff that dragged other banks – even those that posted recent earnings “beats” – substantially lower.
“There’s still some skittishness on the Street that there could be some hidden dangers from these regional banks,” said Crewe Advisors CIO Dustin Thackeray.
“You’re seeing some cautiousness with that, but then mixed with positive earnings. It’s been, generally, a good earnings season so far.”
Fears of rough earnings results from Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOG), both of which are due to report this evening, caused tech shares to sink right alongside banks.
Expectations are low for GOOG, in particular, after the company missed estimates the last four times it reported earnings.
“The tech rebound since the start of 2023 is over,” said Sanders Morris Harris chairman George Ball.
“It is almost impossible for big tech companies to continue growing revenue at the robust pace they have been used to over the past few years.”
Consumer expectations are slipping as well as indicated by the latest Consumer Confidence Index reading, which was released this morning. The index fell from 104 in March to 101.3 in April while inflation expectations over the next 12 months remained unchanged at 6.2%.
“While consumers’ relatively favorable assessment of the current business environment improved somewhat in April, their expectations fell and remain below the level which often signals a recession looming in the short-term,” said Ataman Ozyildirim, Senior Director at The Conference Board.
“Consumers became more pessimistic about the outlook for both business conditions and labor markets. Compared to last month, fewer households expect business conditions to improve and more expect worsening of conditions in the next six months. They also expect fewer jobs to be available over the short term. April’s decline in consumer confidence reflects particular deterioration in expectations for consumers under 55 years of age and for households earning $50,000 and over.”
In short, it was another “stagflationary” reading that left investors feeling more concerned than not. With a Fed rate hike likely approaching on May 3rd, that means the Fed is about to hike into an economy that’s simultaneously slowing and experiencing still way too high inflation – a worst-case scenario for long-term bulls.
