Earnings Outweigh Fed?-List of Companies Lowered Q3 Guidance
As the Q2 earnings season comes to an end, the stock market rally also paused after Powell's speech.
While everyone blames Powell for the market dive, an analyst from Morgan Stanley called on investors not to focus on Fed but on the company's earnings.
1.Why do companies earnings outweigh Fed's policy?
Morgan Stanley’s analyst holds that the most significant risk to stocks is weakness in earnings.
Wilson said,
While the first half of the year was dictated by Federal Reserve policy and tighter financial conditions, the second half will be determined by earnings expectations for next year.
As a result, equity investors should be laser focused on this risk, not the Fed, particularly as we enter the seasonally weakest time of the year for earnings revisions, and inflation further eats into margins and demand.”
Wilson warned that the biggest risk to the stock market will be weak earnings as companies tire of tightening financial conditions and soaring inflation, and earnings guidance will be revised down sharply in the second half of the year, when the stock market will really hit bottom.
He writes that earnings expectations will fall by at least 5%, and possibly as much as 15-20%.
While many companies are vulnerable to rising interest rates, Morgan Stanley believes tech companies are particularly at risk because they're over-valued.
In addition, soaring interest rates have increased the cost of financing, increasing the risk for young and growth companies that haven't profited yet.
In the Q1 and Q2 earnings season, we found that "the current results are far less than expectation" and "next quarter earnings guidance is less than expected" are the top 2 reasons behind stocks' plunge.
Thus, this article summarized the companies that cut guidance for Q3, which might indicate opportunities because they may bottom out in Q2 or should be avoided because they lowered guidance again and again.
2. Companies that Cut Guidance For Q3
a. $Meta Platforms, Inc.(META)$
The company estimates revenues for Q3 between $26 billion and $28.5 billion. This would imply another quarter-over-quarter decrease for the business' growth. Analysts had expected $30.4 billion.
Roku guided for third-quarter revenue to increase just 3% year over year to $700 million, which was more than $200 million below what analysts were expecting.
The company is currently predicting a total of $7.84 billion in revenue. However, financial analysts had originally estimated $8.1 billion in revenue.
The company is forecasting revenues of $5.9 billion for the period, which is $1 billion or 15% below the current consensus estimate
Micron's revenue guidance for the next quarter is $6.8-7.6 billion, significantly below market expectations of $9.14 billion.
f. $Palantir Technologies Inc.(PLTR)$
On 8 AUG, Palantir posted a surprise loss in the quarter and also lowered its 2022 guidance.
Looking ahead to the third quarter, Palantir said it expects sales to be between $474M and $475M, compared to estimates of $508.23M.
For the fiscal third quarter, Salesforce called for $7.82 billion to $7.83 billion in revenue.
Analysts polled by Refinitiv had been looking for$8.07 billion in revenue.
The revenue guidance would have been $250 million higher were it not for the impact of exchange rates, Salesforce said.
h. $Zoom(ZM)$
$Zoom(ZM)$ not only missed the earnings estimates for the quarter but also lowered its full-year guidance.
Management guided for revenue between $1.095 billion and $1.1 billion, compared to the eatimates of $1.15 billion.
So, Zoom's guidance for both the top and bottom lines fell short of the analyst consensus estimate.
Note:
1. In addition to these star companies in stock market, many retail and supermarket companies also lowered their Q3 guidance like $Nordstrom(JWN)$ , $Kohl's(KSS)$ because they suffered from the surging cost brought by inflation.
In other words, the retail sector suffered directly from inlation as tech companies suffered much from rate hike.
2. Social media and semiconductor sector performed badly due to weakness in ad and semi down cycle. But some companies also delivered excellent earnings in Q2 like $Trade Desk Inc.(TTD)$ in ad industry and $ON Semiconductor(ON)$ in semiconductor industry.
The stock performance is closely connected to the broader market. But we also find that excellent earnings are always awarded by the market.
Bottom Line
It's hard to decide there are opportunities or traps in the companies mentioned above.
But it's quite certain that many companies are to lower guidance in the future and share prices may jump suddenly.
There are some companies that missed expectations but did not provide guidance including $Snap Inc(SNAP)$ , $Roblox Corporation(RBLX)$, and $Unity Software Inc.(U)$. Investors should be wary of these growth companies if the broader market become worse in Q3.
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Thanks @Capital_Insights for your valuable insights not to focus too much on the Feds but on the company's earnings. This is a valuable advice in volatile times like now.