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Tag: Corporate profits

  • Microsoft and Meta profits are soaring but their stocks are sagging because both companies aren’t building data centers fast enough

    Microsoft and Meta profits are soaring but their stocks are sagging because both companies aren’t building data centers fast enough

    NEW YORK (AP) — Wall Street is feeling the downside of high expectations on Thursday, as Microsoft and Meta Platforms drag U.S. stock indexes lower despite delivering strong profits for the summer.

    The S&P 500 was down 1.6% in midday trading and on track for its worst day in nearly eight weeks, falling further from its record set earlier this month. The Dow Jones Industrial Average was down 418 points, or 1%, as of 11:15 a.m. Eastern time. The Nasdaq composite was 2.4% lower and heading for a second straight loss after setting its latest all-time high.

    Microsoft reported bigger profit growth for the latest quarter than analysts expected. Its revenue also topped forecasts, but its stock nevertheless sank 6% as investors and analysts scrutinized for possible disappointments. Many centered on Microsoft’s estimate for upcoming growth in its Azure cloud-computing business, which fell short of some analysts’ expectations.

    The parent company of Facebook, meanwhile, likewise served up a better-than-expected profit report. As with Microsoft, though, that wasn’t enough for the stock to rise. Investors focused on Meta Platforms’ warning that it expects a “significant acceleration” in spending next year as it continues to pour money into developing artificial intelligence. It fell 3.6%.

    Both Microsoft and Meta Platforms have soared in recent years amid a frenzy around AI, and they’re entrenched among Wall Street’s most influential stocks. But such stellar performances have critics saying their stock prices have simply climbed too fast, leaving them too expensive. It’s difficult to meet everyone’s expectations when they’re so high, and Microsoft and Meta were both among Thursday’s heaviest weights on the S&P 500.

    The next two companies in the highly influential group of stocks known as the “Magnificent Seven” to deliver their latest results will be Apple and Amazon. They’re set to report after trading ends for the day, and both fell at least 1.3% on Thursday.

    Earlier this month, Tesla and Alphabet kicked off the Magnificent Seven’s reports with results that investors found impressive enough to reward with higher stock prices. The lone remaining member, Nvidia, will report its results later this earnings season, and its 4.3% drop was Thursday’s heaviest weight on the market after Microsoft.

    The tumble for Big Tech on the last day of October is helping to wipe out the S&P 500’s gain for the month. The index is down 0.7% and on track for its first down month in the last six, even though it set an all-time high during the middle of it.

    Still, it wasn’t a complete washout on Wall Street thanks in part to cruise ships and cigarettes.

    Norwegian Cruise Line Holding steamed 8.2% higher after delivering stronger profit for the latest quarter than analysts expected. The cruise ship operator said it was seeing strong demand from customers across its brands and itineraries, and it raised its profit forecast for the full year of 2024.

    Altria Group rose 7.6% for another one of the S&P 500’s bigger gains after it also beat analysts’ profit expectations. Chief Executive Billy Gifford credited resilience for its Marlboro brand, among other things, and announced a cost-cutting program.

    Oil-and-gas companies also generally rose after the price of a barrel of U.S. crude gained 1.3% to recoup some of its losses for the week and for the year so far. ConocoPhillips jumped 4.9%, and Exxon Mobil gained 1%.

    In the bond market, Treasury yields continued their climb following a mixed set of reports on the U.S. economy.

    One report said a measure of inflation that the Federal Reserve likes to use slowed to 2.1% in September from 2.3%. That’s almost all the way back to the Fed’s 2% target, though underlying trends after ignoring food and energy costs were a touch hotter than economists expected.

    A separate report said growth in workers’ wages and benefits slowed during the summer. That could put less pressure on upcoming inflation. A third report, meanwhile, said fewer U.S. workers applied for unemployment benefits last week. That’s an indication that the number of layoffs remains relatively low across the country.

    Treasury yields swiveled up and down several times following the reports before climbing. The yield on the 10-year Treasury rose to 4.31% from 4.30% late Wednesday. That’s up sharply from the roughly 3.60% level it was at in the middle of last month.

    Yields have been rallying following a string of stronger-than-expected reports on the U.S. economy. Such data bolster hopes that the economy can avoid a recession, particularly now that the Fed is cutting interest rates to support the job market instead of keeping them high to quash high inflation. But the surprising resilience is also forcing traders to downgrade their expectations for how deeply the Fed will ultimately cut rates.

    In stock markets abroad, indexes sank across much of Europe and Asia.

    South Korea’s Kospi dropped 1.5% for one of the larger losses after North Korea test launched a new intercontinental ballistic missile designed to be able to hit the U.S. mainland in a move that was likely meant to grab America’s attention ahead of Election Day.

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    Stan Choe, The Associated Press

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  • Trimming the fat: inflation finally hitting profit margins

    Trimming the fat: inflation finally hitting profit margins

    NEW YORK (AP) — Corporate profits have withstood raging inflation over much of the last year, but those good times may be ending.

    Profits stayed fat even as companies’ costs rose thanks to one simple trick: Businesses boosted the prices they charged customers by more than their own costs rose.

    Now, though, more companies are seeing their costs rise faster than their revenues. In the parlance of finance executives, their margins are getting squeezed, and that’s acting as a drag on their profits.

    To be sure, corporate profits are still near record highs. Companies in the S&P 500 are in the midst of reporting overall growth of roughly 2% for the summer from a year earlier. Many companies also say they still have the power to hold the line on prices for their products, if not raise them further. But some signs of stress are beginning to show, and analysts say even faster margin declines may be on the way given how fragile the economy is.

    Consider LyondellBasell, an international chemical company. Its chief financial officer recently said the company saw margins get squeezed last quarter “across all segments due to rising costs and weaker global demand.”

    Coffee giant Starbucks, meanwhile, was one of the many companies that successfully pushed through price increases over the last year with no drop-off in customer loyalty or transactions because of them. But when executives earlier this month discussed their latest results, interim CEO Howard Schultz said, “We’re certainly not going to try and raise prices during this time.”

    Profit margins for S&P 500 companies during the summer look like they dipped to 11.9%, according to FactSet. That essentially means they kept $119 of every $1,000 in sales as profit. That’s down from $122 three months earlier and from $129 a year earlier, but still above the average of $113 over the last five years.

    One of the biggest reasons for the fall in margins is the recent rise in pay that workers have won recently. Total compensation for workers in the private industry rose 5.2% in the summer from a year earlier. Once workers get such increases, companies find it difficult to take them away.

    “The combination of sticky wage costs and slowing end market/consumer pricing has been evident in recent macro data and loudly signals margin pressure,” strategists at Morgan Stanley wrote in a recent report.

    They’re more pessimistic about trends for profit margins than most of Wall Street, forecasting a drop of 1.5% percentage points in 2023. That’s why they see a fall of 11% for profits at S&P 500 companies next year.

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