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Need to Know: Why the rout for big tech companies may just be getting started

Wall Street isn’t looking at a too-terrible day ahead, when you strip out tech that is.

Late Wednesday was another cold, wet blanket for investors as Facebook parent Meta Platforms added its own ugly results to a gloomy pile of tech earnings. Margin pressure and weak ad demand may bode poorly for two more big names coming after Thursday’s closing bell.

“The recent price hikes announced by Apple should mitigate some of the expected weakness in the outlook, while Amazon will face triple pressure points in its e-commerce, advertising, and cloud business,” cautions Saxo Bank strategists.

We are staying on hot-button tech in our call of the day, which indicates it may be too soon to go dip buying in the sector, because the worst may not be over.

The Felder Report blog’s Jesse Felder, says if you combine market caps of Microsoft
MSFT,
-7.72%
,
Apple
AAPL,
-1.96%
,
Nvidia
NVDA,
-2.75%
,
Tesla
TSLA,
+1.00%

and Amazon.com
AMZN,
-4.10%

(he refers to them as ‘MANTA’) and compare that with their aggregate free cashflow, you get a forward earnings multiple of plus 50 times. But that’s down from 70 times at the start of 2022.

“This historic level of overvaluation was only made possible by massive money printing on the part of the Fed that supported both cash flows and the multiple applied to them,” Felder writes. “Now that inflation is raging, however, the money printer has been shifted into reverse and that’s already having a visible impact.”

His below chart is a consolidation of that reversal in valuations and falling liquidity:

TheFelderReport.com

The chart shows just how bad tech valuation could get, if it tracks the red dotted line representing Fed normalizing its balance sheet for the next few years. Thus, that valuation reversion could just be getting started, while price-to free cash flow ratios could see another 50% drop from current levels, said Felder.

A reversal in free cash flow would make the situation even more painful, he says. “Worryingly, that reversal in cash flows is actually what has happened over the past year in which growth went from double digits positive to double digits negative.”

Felder warned in April that given the pandemic and ensuing stimulus, it’s possible there was a “significant pulling forward of demand for Big Tech products and services that will now leave a vacuum of demand for a prolonged period of time.”

He says we are starting to see what that might look like, with a Fed-induced recession unlikely to help.

The markets

U.S. stock futures
ES00,
+0.08%

YM00,
+0.70%

are higher, with the exception of tech
NQ00,
-0.42%
,
while bond yields
TY00,
-0.35%

TMUBMUSD02Y,
4.453%

are creeping up, along with the dollar
DXY,
+0.32%
.
Oil prices
CL.1,
+0.34%

are also up and bitcoin
BTCUSD,
-0.71%

is holding at $20,078.

The buzz

Meta shares
META,
-5.59%

are down nearly 20% in premarket after the Facebook parent’s earnings earnings and revenue fell short of hopes, as it aped Alphabet
GOOGL,
-9.14%

and Snap’s
SNAP,
-0.21%

digital ad gloom. And Wall Street downgrades are trickling in.

Opinion: Facebook and Google grew into tech titans by ignoring Wall Street. That could lead to their downfall

Upbeat results have lifted shares of Caterpillar
CAT,
+1.09%
,
Merck
MRK,
+0.72%
,
McDonald’s
MCD,
+0.34%
,
Honeywell
HON,
+0.33%

and Southwest
LUV,
-0.72%
,
which says its planes are fuller than before the pandemic.

And after the close, in addition to Apple and Amazon.com, Intel
INTC,
-0.73%

and a few others will report.

The European Central Bank is expected to make another jumbo 75-basis point rate hike on Thursday. A decision is due at 8:15 a.m. Eastern, followed 30 minutes later by President Christine Lagarde’s press conference.

Housing slowdown hits real-estate service group Zillow
Z,
-1.73%
,
which confirmed more layoffs.

The first estimate of third-quarter gross domestic product is due at 8:30 a.m., with a 2.3% bounce expected after two straight declines, but that won’t stop recession talk. Weekly jobless claim and durable goods orders are due at the same time.

Elon Musk, facing a Friday deadine to complete his $44 billion Twitter
TWTR,
+1.08%

purchase, reportedly told staff that he won’t slash 75% of the workforce. And he brought a kitchen sink:

Ford
F,
-0.08%

will wind down its investment in soon-to-be closed self-driving startup Argo AI.

Credit Suisse
CS,
-1.03%

is bringing back its First Boston name and cutting 9,000 jobs in a sweeping restructure as the Swiss bank posted a massive loss.

Best of the web

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The chart

How surprising have tech earnings been? Check out this tweet by the Tao of Trading founder Simon Ree:

The tickers

These were the top-searched tickers on MarketWatch as of 6 a.m. Eastern:

Ticker

Security name

META,
-5.59%

Meta Platforms

TSLA,
+1.00%

Tesla

GME,
-5.40%

GameStop

MULN,
+6.28%

Mullen Automotive

NIO,
+1.69%

NIO

AMC,
-1.63%

AMC Entertainment

AAPL,
-1.96%

Apple

BBBY,
-5.48%

Bed Bath & Beyond

MSFT,
-7.72%

Microsoft

TWTR,
+1.08%

Twitter

Random reads

TikTok “Kia challenge” involving stealing a car leaves four teens dead.

Pope says online porn is a dangerous vice, and even nuns are doing it.

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Listen to the Best New Ideas in Money podcast with MarketWatch reporter Charles Passy and economist Stephanie Kelton.

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