One of the tightest relationships between asset classes since the Covid-19 pandemic first erupted is the link between bond yields and tech stocks. That makes intuitive sense—tech companies are typically priced based on future profits rather than current ones, so they are more sensitive to expectations of future inflation. Plus, tech companies have thrived as office workers have been forced to stay at home, using services such as remote calling and cloud storage to replicate the work environment from their bedrooms.
Like all market relationships, however, they don’t always last forever. And perhaps this earnings season is the one where tech companies will still start trading to the beat of the broader economy, rather than against it.
Apple
shares lost ground after it wasn’t able to sell as many iPhones as anticipated, which the company, like many, blamed on availability rather than demand.
Amazon.com
reeled as both its third-quarter profit, and outlook for the fourth quarter, were affected by supply-chain and staffing issues.
A tech sector that trades with, rather than against, the economy isn’t necessarily bad news, given that there’s still plenty of opportunity for further recovery, particularly with so many job openings from a labor force now cut off from extra unemployment benefits. But it would mark a sea change from what traders have grown to expect.
—Steve Goldstein
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***
U.S. Economy Just Endured Its Worst Stretch Since Recession
Gross domestic product in the third quarter, which included a rough August when the Delta variant of coronavirus spread rapidly, slowed to a worse-than-forecast 2% annualized growth, the Commerce Department estimated Thursday.
- That is much slower than the 6.7% outburst in the second quarter and the worst showing since the U.S. economy first reeled from the Covid-19 outbreak.
- Supply-chain woes were evident. The decline in spending on motor vehicles and parts, on its own, subtracted 2.4 percentage points from growth, and services spending growth slowed down, though to a still rapid 7.9% as the economy reopened further.
- Looking forward, supply-chain disruptions aren’t about to end soon, and it’s impossible to rule out more bad news on the coronavirus front, particularly heading into the winter months.
What’s Next: There is good news, too. Oxford Economics, which compiles a recovery tracker based on factors including financial conditions, production and health conditions, reported the best showing in the Oct. 15-ending week since February 2020. The U.S. economy looks set for further improvement in the next few months, as long as Covid doesn’t again derail things.
—Steve Goldstein
***
Biden Outlines Proposals in $1.85 Trillion Spending Bill
President Joe Biden outlined his $1.85 trillion social spending and climate change package, which House Democrats hoped would convince their progressive caucus colleagues to pass a separate $1 trillion infrastructure bill. “No one got everything they wanted, including me,” he said.
- The proposal includes money for child care and universal prekindergarten, child tax credits through 2022, funding for in-home care for elderly and disabled people, $555 billion for climate change, expanded Affordable Care Act subsidies, and Medicare hearing benefits, but no paid family leave.
- It proposes a 5% surtax on people with adjusted income over $10 million and a 15% minimum tax on profitable corporations. But other money-raising ideas could be cut, including taxing the unrealized investment gains of billionaires and transaction-reporting requirements for banks.
- Biden left for the G-20 world leader summit in Italy and then the United Nations climate summit in Glasgow, Scotland. Democratic leaders urged members to pass the smaller infrastructure bill on Thursday but later abandoned that plan, The Wall Street Journal reported.
- Lawmakers were preparing to vote on a short-term patch to transportation funding, which expires on Sunday, in the event they don’t get to a vote on the $1 trillion infrastructure bill, which funds bridges, roads, railways, and other projects.
What’s Next: Progressives want more certainty about the social spending bill’s contents and how it will fare in the Senate, where two Democrats have forced lawmakers to cut programs and priorities. The Senate already passed the infrastructure bill.
—Janet H. Cho
***
Apple’s Dismal Quarter Shows Chip Shortage Here to Stay
The global chip shortage helped cut Apple’s fiscal fourth-quarter revenue by $6 billion, another victim of the year-old global chip-supply bottleneck amid a scarcity of raw materials and hiccups with production and logistics.
- The iPhone maker had already warned that component shortages could affect some products. Its iPhone sales rose 47% from last year but at $38.9 billion fell short of expectations. iPad sales rose 21% but again fell short of estimates.
- The $464 billion semiconductor industry hasn’t kept up with soaring demand. Chip shortages mean the smartphone industry will grow only 6% this year, half as quickly as initially forecast by Counterpoint Research, The Wall Street Journal reported.
-
Intel
CEO Pat Gelsinger said he expects shortages to last until 2023, saying of lost sales: “We would be shipping a lot more if we weren’t constrained by the supply chain of these other components.” Other buyers are hearing delivery dates in 2024, the Journal said. -
General Motors
and
Ford Motor
each said chip shortages dented their factory output and cut third-quarter profits. Dutch medical-equipment supplier
Royal Philips
said it lost about $174 million in missed third-quarter sales.
What’s Next: Major chip makers including
Taiwan Semiconductor Manufacturing
,
Samsung Electronics
,
and Intel all plan to increase their production capacity, but their billion-dollar-facilities won’t open for years. Analysts warn that hoarding chips now could lead to an oversupply when demand cools.
—Janet H. Cho
***
Daimler Profit Up Due to Focus on Premium Models
German car maker
Daimler
said Friday that operating profit in the third quarter rose 18% from the same period last year, as cost cuts and a priority on high-end models helped it navigate through the global chip shortage.
- The maker of Mercedes-Benz cars said the number of vehicles sold dropped by 25% in the quarter, but sales remained at the same level as last year, at €40.1 billion ($47 billion) against €40.3 billion in the third quarter of 2020.
- Daimler has focused on high-end, more profitable vehicles, notably its S-class or Maybach models, to make up for the quantitative loss of production caused by the chip crunch and other supply-chain disruptions.
- The group now sees the semiconductor shortage problem improving in the last months of the year, but lasting into 2022. CFO Harald Wilhelm said in a call with analysts that the chip issue “will continue to be a priority for [the group] moving forward.”
What’s Next: Harald said the group “remain(s) on track” to meet its full-year targets. The group’s results contrast with those of
Volkswagen
,
which announced this week a 12% drop in operating profit in the third quarter, and cut its outlook for deliveries.
—Pierre Briançon
***
Amazon Says Labor, Supply, Delivery Costs Will Hurt Q4
Amazon.com warned of several billion dollars of additional costs in the fourth quarter because of labor shortages, global supply-chain challenges, and higher delivery costs. Thursday night it reported disappointing results for the third quarter for the same reasons.
- Revenue of $110.8 billion and operating profit of $4.9 billion were within guidance but Wall Street didn’t like it. The results compared badly to last year’s pandemic shopping and didn’t include Prime Day, which was in the second quarter this year.
- Amazon wants to hire another 275,000 permanent and seasonal employees, and has raised wages to an average of $18 an hour, plus $3,000 bonuses in some areas. It has also offered to pay some workers’ college tuition starting in January 2022.
- The National Labor Relations Board said a group of Amazon workers in four Staten Island company facilities have shown enough interest for a potential union election. Amazon, which says it prefers negotiating directly with workers, is expected to contest the group’s organizing efforts.
What’s Next: Amazon projects fourth-quarter sales of up to $140 billion, below analysts’ expectations of $142.2 billion. CEO Andy Jassy, who took the reins from founder Jeff Bezos on July 5, said Amazon will do “whatever it takes” to minimize the effects on customers and selling partners.
—Janet H. Cho
***
Facebook Is Going All Metaverse, and Changing Its Name
Mark Zuckerberg, plagued by criticism over
Facebook
’s
privacy and security policies and dogged by multiple regulatory probes and withering whistleblower testimony about its practices and document leaks, has decided to change the name of the company that runs Facebook to Meta—and pivot to the virtual world.
- Facebook’s CEO told a virtual-reality conference audience that he was pushing to be “metaverse first.” The metaverse is the next generation of the internet where people play games, shop and interact in always-on virtual worlds.
- Facebook’s ticker symbol will change to MVRS from FB. The brand will stay attached to the social media platform. It also owns brands Instagram, Oculus and WhatsApp.
- Zuckerberg’s metaverse would be powered by augmented reality and virtual reality and integrate aspects of the current internet and the real world. Facebook has an augmented-reality partnership with Ray-Bans and a virtual-reality device called Project Cambria to be compatible with Oculus Quest headsets.
- Facebook has various investments in virtual spaces for social interaction, entertainment, games, fitness, and work, and is looking to work with developers to build the metaverse.
What’s Next: Zuckerberg said the company is working with experts to make sure there is interoperability, transparency, inclusivity, safety, and privacy in the metaverse from the start.
—Connor Smith and Liz Moyer
***
Do you remember this week’s news? Take our quiz below about this week’s news. Tell us how you did in an email to thebarronsdaily@barrons.com.
1. How many people retired early out of the 5.25 million who left the labor force during the pandemic, according to recent research from the St. Louis Fed?
a. More than 1 million
b. More than 2 million
c. More than 3 million
d. More than 4 million
2. Which company did Facebook’s CEO Mark Zuckerberg cite as “one of the most effective competitors that we have ever faced?”
a. Tik Tok
b. Apple’s iMessage
c. Twitter
d. Discord
3. Tesla became the fifth U.S. company to cross the $1 trillion valuation mark thanks, in part, to a 100,000 car order from which car-rental company?
a. Avis Budget Group
b. Sixt
c. Hertz Global Holdings
d. Europcar Mobility Group
4. Robinhood Markets’ share price fell below its IPO price after the company reported disappointing earnings results that included:
a. A revenue shortfall
b. A large decline in cryptocurrency transactions
c. Slightly lower funded accounts
d. All of the above
5. Daniel Loeb’s Third Point took a large stake in an oil giant, urging it to split its renewables business from its legacy refining business. Which oil major is it?
a. Royal Dutch Shell
b. TotalEnergies
c. Chevron
d. Exxon Mobil
Answers: 1(c); 2(a); 3(c); 4(d); 5(a)
—Barron’s Staff
***
—Newsletter edited by Liz Moyer, Mary Romano, Camilla Imperiali, Rupert Steiner
