US equities slipped Friday after underwhelming quarterly financial results from major internet companies unnerved markets.
The S&P 500 (^GSPC) fell 1.74%, or 47 points, at the end of trading Friday. The Dow (^DJI) tumbled 1.19%, or 296.24 points. The Nasdaq (^IXIC) fell 2.06%, or 151.12 points.
Friday’s rout sent the S&P 500 into corrective territory. At its intraday low, the S&P 500 was down 10.6% from its September 21 year-to-date intraday high of 2,940.91. The Nasdaq entered a correction on October 11. The Dow is down 8.4% from its record high of 26,951.81.
This comes even as companies have actually been reporting relatively strong earnings, Jonathan Golub, chief US equity strategist of Credit Suisse, wrote in a note Friday. Earnings per share are beating estimates by “an impressive 6.1%,” and year-over-year growth is on target to top 26%, or 18% after tax benefits are excluded, he wrote.
“Despite these impressive realities, investors seem convinced that higher input costs and China-related trade issues are in the process of undermining corporate profitability,” Golub said. “Management guidance has emphasized these concerns, which appear quite overstated relative to the numbers. Unfortunately, the market seems more focused on what it hears rather than what it sees.”
A stronger-than-expected first estimate of economic growth did little to help indices pare losses, with an advance reading of gross domestic product registering above consensus expectations.
FILE PHOTO: A screen displays a chart of the Dow Jones Industrial Average on the floor of the New York Stock Exchange (NYSE) in New York, U.S., October 24, 2018. REUTERS/Brendan McDermid/File Photo
ECONOMY: GDP grows at faster-than-expected pace
The US economy grew at an annualized rate of 3.5% during the third quarter of2018, according to firstestimates released Friday from the Bureau of Economic Analysis. This represented a slowdown from the 4.2% pace of growth in the previous period but came in above consensus expectations of a 3.3% rate anticipated by economists. The Trump administration has set a target rate of 3% growth for the US economy.
“Overall the data suggest a modest deceleration after a very strong Q2, with the slowdown led, as expected, by the net export category, with a rebound in inventories countering some of that,” Dave Lutz, an analyst with JonesTrading Annapolis, wrote in a note Friday.
Growth in personal consumption expenditures contributed to the higher-than-expected reading for GDP. Consumer spending, comprising a majority of economic activity, grew at a pace of 4%, or its highest level since 2014. This exceeded the 3.3% pace expected by economists and 3.8% rate from the second quarter.
The personal consumption expenditures index, a measure of underlying inflation, registered at 1.6% quarter-over-quarter, a decrease from the second quarter’s reading of 2.1%. Consensus estimates had been for 1.8%.
The University of Michigan’s reading for consumer sentiment weakened to 98.6 for October from 100.1 in September, coming in slightly short of estimates of a reading of 99. The current economic conditions gauge capturing Americans’ perceptions of their own finances fell to 113.1 from 115.2 in September.
The headline sentiment index has been higher so far in 2018 than in any year since 2000, Richard Curtin, Surveys of Consumers chief economist, noted in the release.
“Importantly, stock price declines, rising inflation and interest rates, and the negative mid-term election campaigns, have not acted to undermine consumer confidence,” Curtin said. “Needless to say, consumers are not immune to these negative factors. The data only indicate that the tipping point toward escalating pessimism has not been reached.”
STOCKS: Alphabet, Amazon disappoint
Google-parent company Alphabet (GOOG) beat on earnings but fell short of average analyst expectations for revenue in its quarterly report Thursday. Earnings came in at $13.06 per share versus consensus estimates of $10.42 per share, while revenue registered at $33.7 billion against expectations of $34.04 billion. Google’s advertising business continued to comprise the largest chunk of the company’s revenue, coming in at 85.8% in the third quarter. Shares of Alphabet fell 2.2% to $1,071.47 each as of market close Friday.
Amazon (AMZN) missed on revenue in the third quarter and lowered its guidance for the current period, sending shares tumbling. The e-commerce company delivered revenue of $56.6 billion, less than the $57.10 billion foreseen by consensus estimates. This marks the second consecutive quarter of the internet company missing on sales. Earnings were $5.74 per share versus $3.14 estimated. The company gave revenue guidance for its key fourth-quarter holiday period of $66.5 billion to $72.5 billion, beneath consensus estimates of $73.79 billion. Amazon’s stock fell 7.82% to $1,642.81 per share at the end of trading Friday.
Shares of Tesla (TSLA) pared gains Friday after the Wall Street Journal reported that the FBI deepened a criminal probe of the company. FBI agents are looking into whether the electric car-maker misstated information about production of its Model 3 sedans and business operations from as far back as early 2017, the WSJ reported. This comes just days following Tesla’s major third-quarter earnings beat, with the company exceeding expectations on the top and bottom lines and posting a profit for just the third time in its eight years as a public company. Shares of Tesla rose 5.09% to $330.90 each as of market close Friday, receding from an intraday high of $339.90.
