Friday, 24 March 2023

Why Amazon, Alphabet, and Microsoft All Rallied Thursday Morning

by Earn Media

What happened

The stock market’s unrelenting volatility is continuing this week. Wall Street has been unable to establish a consistent direction as investors weigh the impact of recent high-profile bank failures against the Federal Reserve’s ongoing battle with inflation and the still-resilient U.S. job market. Despite the uncertainty, a broad cross-section of stocks rallied Thursday morning as investors digested the latest unemployment figures.

With these developments as a backdrop, as of 11:33 a.m. ET, Amazon (NASDAQ: AMZN) was up 1.8%, Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) had climbed 2.2%, and Microsoft (NASDAQ: MSFT) had climbed 2.9%,

A check of all the usual sources found nothing in the way of company-specific news that could have fueled investor enthusiasm in those particular tech giants, which suggests that traders are pondering what the latest developments mean for the state of the broader economy.

Why Amazon, Alphabet, and Microsoft All Rallied Thursday Morning

Image source: Getty Images.

So what

The weekly unemployment report, courtesy of the Department of Labor, revealed that for the week ending March 18, initial jobless claims declined by 1,000 to 191,000, which was well below economists’ consensus forecast of 197,000. It also marked the second successive dip in weekly new jobless claims. Continuing claims — the number of people already collecting unemployment benefits — rose by 14,000 (a less than 1% increase) to a total of 1.69 million.

The biggest takeaway from that report is the remarkable resilience of the U.S. job market. Unemployment claims remain historically low, with nearly two openings for every job seeker.

A stable job market is normally viewed as desirable, but these are extraordinary times. Inflation remains stubbornly high despite the Fed’s campaign of rising interest rates, which is designed to slow the overheated economy.

The job market news came in the wake of the Fed’s decision Wednesday to raise the benchmark federal funds rate by 0.25 percentage points (25 basis points) to a target range between 4.75% and 5%. It was the ninth consecutive meeting of the Federal Open Market Committee at which that group has hiked interest rates since Fed Chair Jerome Powell embarked on a mission to rein in red-hot inflation, which, while well below its 2022 peak, remains historically high.

The central bank changed the boilerplate language that accompanied its decision somewhat. Policymakers removed the phrase “ongoing increases,” which suggests that an end to this string of rate hikes could be on the horizon.

The Fed has been increasing interest rates to make borrowing more expensive. This causes consumers and businesses to cut back on spending, which in turn reduces demand — which any student of economics will tell you will eventually result in falling prices and cooling inflation.

Now what

The market rally and the Fed’s encouraging words aside, investors shouldn’t get their hopes up yet, as challenges remain for the broader economy and our trio of companies.

  • After a period of unbridled e-commerce adoption, digital retail growth is slowing, especially as consumers are faced with higher prices. As the leader in online retail, Amazon has been hit hard, but conversely, it’s well positioned to ride the coming rebound. In fact, recent data suggests e-commerce may have finally turned a corner.
  • When faced with macroeconomic uncertainty, companies generally cut back on spending in order to shore up their financial positions. Marketing budgets are among the first to be cut, as advertising is an expenditure that’s easy to dial down and ramp back up. Ad tech companies — including Alphabet — invariably suffer when ad sales decline.
  • Sales of computers — with their pre-installed software — also tend to drop significantly during troubled economic periods, as do enterprise software sales. This represents a one-two punch to Microsoft, which makes nearly two-thirds of its revenue from its more personal computing and productivity and business segments.

Perhaps more important than Thursday’s short-term share price movement is the long-term opportunity provided by the continuing market downturn. All three of these industry-leading companies are still well below the peaks they reached in late 2021, with Microsoft, Alphabet, and Amazon down 18%, 29%, and 46%, respectively.

MSFT Chart

Data by YCharts

Amazon is by far the best bargain among our trio, selling for just 1.6 times next year’s sales. For context, experts view a price-to-sales ratio of between 1 and 2 as reasonable. Microsoft and Alphabet still have a degree of optimism baked into their valuations, trading for 9 times and 4 times next year’s sales, respectively. I would argue that each of these companies has a strong history of growth and robust opportunities that justify a premium valuation. Furthermore, each is cheaper than it has been in years.

For investors who have the stomach to handle short-term volatility and the intent to hold onto their investments for at least three to five years, these tech titans represent clear buying opportunities.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet, Amazon.com, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon.com, and Microsoft. The Motley Fool has a disclosure policy.

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