Wall Street Lunch: Tech Stocks That Go Bump In The Night

Summary:

• Worries on outlook from Microsoft and Meta spur a selloff in the tech sector.
• The core PCE price index edged up in September, raising some concerns about sticky services prices.
• Estee Lauder is hammered after pulling guidance and slashing its dividend.

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Guidance from Microsoft and Meta spark a spooky selloff. (0:15) The Fed’s favorite inflation gauge ticks up. (2:00) Estée Lauder slashes its dividend. (3:16)

Our top story so far. The stock market is getting spooked by the specter of weak tech outlook.

A Halloween selloff is hitting Wall Street, threatening to take an axe to all the gains of October. The major averages are a splatter of blood red, with the S&P 500 (SP500) down -1.5% and now flat for the month, while the Dow (DJI) is off -0.75%. But big casualty is the Nasdaq (COMP.IND), falling 2.5%.

Investors anxiously awaiting bullish guidance from megacaps Microsoft (NASDAQ:MSFT) and Meta (NASDAQ:META) were left as crestfallen as Linus in the sincere pumpkin patch with no Great Pumpkin.

Microsoft is slumping after guiding for a slight decline for growth at its Azure unit to 31% to 32% in its fiscal Q2 from 34% in the just-reported Q1.

Barclays analyst Raimo Lenschow said: “In the short term, we fear the wait will continue for MSFT’s shares. Short-term supply issues around AI capacity are likely to cause stable Azure consumption trends in Q2 vs. Q1, which is solid but not necessarily a new catalyst that gets investors excited.”

Meta (META) is faring better but also down.

J.P. Morgan analyst Doug Anmuth said strong 4Q revenue outlook ($45B-$48B, +12%-20%) was offset by expectations for significant growth in 2025 capex and infrastructure-related expenses, especially depreciation. But he added that the company has earned the right to spend big on generative AI.

Along with these Magnificent 7 members, tech stocks are falling across the board, including semiconductors. Another tumble in AI darling Super Micro Computer (SMCI) isn’t helping, even though its problems are more company specific. The stock, which was up 350% this year at its peak, is now unchanged for 2024.

Looking to bonds, yields are mixed after a double-dose of inflation reports.

The core PCE price index, the Federal Reserve’s preferred inflation gauge, rose +0.3% M/M in September, matching the economists’ consensus. On an annual basis, core PCE, which excludes food and energy, increased 2.7%, a hair above the +2.6% consensus and even with the 2.7% increase in August.

The headline PCE Price Index climbed 0.2% M/M, in line, and fell to a 2.1% annual rate from +2.2% prior.

On the other hand, the Q3 Employment Cost Index rose +0.8% vs. +0.9% expected and +0.9% in Q2, marking the lowest print since Q2 2021.

Wells Fargo economists say the ECI “should boost policymakers’ confidence that the labor market is no longer a threat to returning inflation to 2%.

But they add, “it is clear that services inflation will need to slow for the Fed to successfully hit its 2% target. Financial markets may have shifted their focus to the labor market, but the Fed is still keeping its eye on inflation progress as it thinks about the pace of monetary easing.”

The markets are still overwhelmingly pricing in a quarter-point cut at next week’s Fed meeting, but the odds dropped slightly after today’s figures. And the chances of another cut in December dipped closer to 70%.

Among other big earnings reports, Estée Lauder (EL) is plummeting after it pulled its full year guidance and slashed its dividend in half as concerns about the China’s economy mount.

CEO Fabrizio Freda said: “While we believe the new economic stimulus measures in China present medium- to long-term potential for stabilization and ultimately growth in prestige beauty, we anticipate still-strong declines near-term for the industry in China and Asia travel retail.”

The company said it is reducing its dividend “to a more appropriate payout ratio,” affording more financial flexibility for the incoming leadership team, now paying out $0.35 a share.

Comcast (CMCSA) reported a top and bottom line beat, but more importantly hinted at divesting its cable operations.

During an earnings call with analysts, the company said it is considering spinning off all its cable business, including CNBC, although discussions are in very early stages.

Uber (UBER) is slumping after the company’s Q4 guidance underwhelmed investors.

Uber sees Q4 gross bookings of $42.75 billion to $44.25 billion (midpoint $43.5 billion) vs. $43.7 billion consensus. The company also expects Q4 adjusted EBITDA of $1.78 billion to $1.88 billion (midpoint $1.83 billion vs. $1.84 billion consensus).

In other news of note, Peloton (PTON) announced that Peter Stern has been appointed to be the company’s next CEO and president.

Stern was noted to have been a Peloton Member since 2016 and an early adopter of both the Bike and Tread. As the co-founder of Apple Fitness+, Stern led its growth to millions of members. He also has grown over a dozen different subscription businesses, ranging from Apple iCloud to Time Warner Cable Home Security to Ford BlueCruise, a hands-free highway driving technology.

And in the Wall Street Research Corner, it hasn’t been a great environment for options trading. In fact, it has been the second-least volatile election-year October in the last 50 years.

But J.P. Morgan has combed the broad Russell 1000 for the best stocks for calls and puts for the current environment.

The sell or buy signals include one-month beta adjusted relative performance, the 63-day price z-score, the 14-day relative strength index, EPS four-week percentage change and the price upside.

Among the call overwriting names are SoFi Technologies (SOFI), Palantir (PLTR) and Robinhood (HOOD). Call buying stocks include Newmont Mining (NEM), Applied Materials (AMAT) and Dollar General (DG).

The put underwriting picks include Regeneron (REGN), Hasbro (HAS) and Etsy (ETSY). Among put buying candidates are Philip Morris (PM), Morgan Stanley (MS) and Nike (NKE).

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