Economic Conditions Are Deteriorating

Snapchat investors get steamrolled … has the entire economy gotten worse in the last four weeks? … a Fed hawk sounds slightly dovish … are we seeing the groundwork of a “dovish pivot”?

Yesterday, Snapchat’s stock was destroyed, collapsing 43% in a single day.

Back in SNAP’s April Q1 earnings announcement, management said it expected second-quarter revenue growth between 20% and 25% year-over-year, and EBITDA between breakeven and $50 million.

All that went out the window Monday evening when the company unexpectedly announced that it is likely to miss those revenue and EBITDA forecasts. It will also slow hiring and spending.

In the filing, Snapchat management noted that due to macroeconomic conditions, “it is likely that we will report revenue and adjusted EBITDA below the low end of our Q2 2022 guidance range.”

***So much can change in just one month

From The Wall Street Journal:

[Snapchat] said it is grappling with a range of issues, from rising inflation to Apple Inc.’s privacy policy changes to the impacts from the war in Ukraine and other factors.

“There is a lot to deal with in the macro environment today,” Chief Executive Evan Spiegel said Monday at a JP Morgan Chase & Co. conference.

Conditions have deteriorated “further and faster” than expected since the company issued its guidance for the current quarter, he said.

This is significant.

In just one month, conditions for SNAP worsened so badly that management is convinced its Q2 results won’t measure up – and that’s despite more than five weeks left for a potential rebound.

Plus, there’s more than nine weeks left before SNAP management has to provide commentary and guidance about upcoming quarterly performance.

Let that sink in.

SNAP’s next earnings announcement is estimated to be around July 28th – more than nine weeks away.

And yet, in only four weeks since SNAP provided its Q1 financial estimates, things have deteriorated so profoundly that it’s throwing in the towel and preannouncing a disappointment.

So, is this simply poor business execution at SNAP? Or is this the proverbial canary in the coalmine, suggesting bigger problems for the sector?

From research shop Piper Sandler: “At this point, our sense is this is more macro and industry-driven versus Snap specific.”

From Citi: “…A slowing macro is likely impacting advertising results across the broader Internet sector, although we believe platforms more exposed to brand advertising—like Twitter, Google’s YouTube, and Pinterest—are likely experiencing a greater impact overall.”

From Jefferies: “I think SNAP’s [earnings preannouncement] is not SNAP-specific. We think it’s an industry-wide ad trend. Companies are continuing to see advertising go as the first thing that you see in an economic downturn.”

***We’re seeing lower guidance practically across the board

FactSet is the go-to earnings-data analytics company used by the pros. As of last Friday, here was their data on corporate guidance for Q2:

…Companies and analysts have been more negative in their outlooks and estimate revisions for Q2 2022 relative to recent quarters.

In terms of earnings guidance from corporations, 70% of the S&P 500 companies (62 out of 88) that have issued EPS guidance for Q2 2022 have issued negative guidance.

For illustrations, we can look to Walmart and Target from their earnings announcements last week.

Walmart now anticipates a full-year earnings contraction of 1%, versus mid-single-digit growth last quarter.

And Target lowered its full-year operating profit growth outlook to 6% from its previous guidance of 8% or more.

Meanwhile, yesterday, Best Buy lowered its top- and bottom-line forecast for the full year. And Abercrombie & Fitch lost about 30% as its Q1 performance and outlook disappointed investors. This morning it was Dick’s Sporting Goods trimming its financial outlook for its fiscal year.

We’re seeing a marked acceleration of headwinds facing parts of the economy, as well as a tightening of purse strings from more price-sensitive shoppers.

But remember, this is what the Fed wants in order to curb inflation.

What will be critical to watch is Q2 earnings season that starts in mid-July. Yes, the markets have been repricing assets to reflect today’s inflationary environment and a hawkish Fed. But it’s not yet clear how earnings multiples will be affected if Q2 earnings underwhelm expectations.

Right now, some stocks are looking pretty cheap. But that’s based on earnings estimates which might have been projected weeks ago. The SNAP news reveals how much can change in just one month.

So, if actual earnings come in lower than estimated earnings, that would instantly make some of today’s reasonable valuations look expensive. And that would likely mean more pressure on those stocks posting disappointing numbers – regardless of how much they’re down today.

***Meanwhile, speaking of the Fed, yesterday we learned that the most hawkish Fed member is seeing a potential rate cut as early as next year

St. Louis Fed President James Bullard has been the most hawkish Fed president. In past Digests, we’ve highlighted how it was Bullard who was calling for a single hike of 0.75%.

Last Friday, in an interview with Fox Business, Bullard sounded optimistic. He even pointed toward coming rate cuts.

From Fox Business:

Despite all the economic headwinds, Bullard forecasted a “pretty good second half of the year,” pointing to “the second reopening going on where people are getting used to the endemic phase of the pandemic.”

He noted that people want to “be out and about and that’s going to lead to strong consumption this year.”

Bullard was asked about his prior call for a 0.75% hike. This time around he had a different take:

Fifty basis points is a good plan for now. I think as always, we have to pay attention to incoming data on the economy and on inflation, and we’ll do that going forward.

Bullard went on to say he wants to get the rate to 3.5% by the end of the year. That’s higher than most other Fed presidents. But Bullard believes that the more the Fed can front-load its hikes to kill inflation, the more room it will have to lower rates to help any collateral damage to the economy.

Back to Fox Business for those details:

He then noted that next year and in 2024, “we could be lowering the policy rate because we got inflation under control.”

Obviously, we’ll take “could be lowering” with a grain of salt the size of SNAP’s market meltdown yesterday. That said, this is a good sign coming from the Fed’s most hawkish member.

And it prompts an important question…

***Are we beginning to see the groundwork of the Fed’s “dovish pivot” that Luke Lango has been predicting?

For newer readers, Luke is InvestorPlace’s hypergrowth expert. He focuses on cutting-edge technology innovators and disrupters that are transforming our world – and have the potential to radically transform a portfolio.

Of course, tech leaders are in a brutal bear market. So, the biggest question is: When will things turn around?

It was almost one month ago to the day that we profiled Luke’s roadmap with his answer. Here he is, from our April 26th Digest:

  1. Stocks are likely to fall further in May; 2) the Fed is likely to turn dovish by summer; and 3) stocks will start rebounding before the dovish pivot.

So far, we’re seeing things play out as Luke predicted.

We’ve seen stocks continue to fall…

We just highlighted Bullard’s slightly more dovish comments. Plus, he isn’t the only Fed president with this tonal shift.

On that note, let’s jump to Luke’s Monday Daily Notes from his Early Stage Investor service:

We’ve noticed a small shift in the Fed’s rhetoric recently, moving to a slightly more dovish stance.

[Monday], for example, Atlanta Fed President Raphael Bostic said that, depending on how the economy reacts, the central bank must be prepared to either accelerate or decelerate the pace of rate increases.

The inclusion of a possible “deceleration” is a dovish twist in the party line of the past few months. 

This means we’re just waiting on the eventual rebound in tech leaders before an official dovish pivot.

Let’s return to Luke’s roadmap for more details on how everything will come together:

This is an inherently dovish Fed. They’re acting hawkish now. But it’s all an act.

For years, this Federal Reserve has been the most dovish in history. As soon as the data gives it a reason to pivot dovish, it will do so (just like 2019).

And it seems the data will give it a reason to do that by June/July.

At that point, inflation will be falling. Economic expansion will be slowing, and stocks will be down.

That will be enough of a negative backdrop to get the Fed to ease up on its tightening cycle. Stocks will subsequently power higher.

Indeed, we think that dovish pivot will set the stage for a 25%-plus melt-up in the entire stock market into mid-2023. 

***So, wrapping up, let’s follow all the breadcrumbs…

The macro environment continues to tighten – though this is what the Fed wants… This is resulting in disappointing earnings, resulting in more market pain, which should be expected… However, we’re seeing the very first green shoots of a dovish shift from the Fed…

Combine all of this with certain elite tech stocks that are down 60%, 70%, even 80%+, and it’s setting up an enormous buying opportunity.

Don’t be in a rush to place your chips – there’s no way to know how much lower the market will go.

But if you don’t have a tech stock buy-list ready, it’s time to put yours together. If you’d like to join Luke in Early Stage Investor to see what’s on his list, click here.

Have a good evening,

Jeff Remsburg

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