Good Earnings Bad Reactions

The US earnings season is getting off to a rocky start.

Alphabet [NASDAQ:GOOGL], Google’s parent, lost an astonishing $700bn in market cap on Thursday (Equivalent to BHP, CBA and ANZ combined).

Then US stock futures came under heavy selling pressure this morning after a string of disappointing earnings announcements following Thursday’s close.

What stood out wasn’t necessarily how bad the results were. In several cases, companies beat expectations and even raised their guidance, only to see their share prices hammered.

It is another sign that investors are becoming far less forgiving of expensive stocks, particularly those exposed to artificial intelligence and technology.

Amazon.com [NASDAQ:AMZN] fell around 7% in after-hours trading after reporting third-quarter revenue of US$202 billion and earnings of US$1.89 per share, both slightly below market expectations.

The results weren’t particularly bad. Revenue increased 12% from a year earlier, while operating income jumped 61% to US$28 billion. Amazon’s operating margin also reached a record 13.9%.

Its cloud computing division, Amazon Web Services (AWS), was particularly impressive. Revenue surged 39.3% to US$46 billion, its fastest growth in almost five years.

But the market is becoming increasingly concerned about the extraordinary sums of money being poured into AI infrastructure.

Amazon expects capital expenditure of approximately US$220 billion this year, largely driven by investment in AI infrastructure and data centres. That spending has already pushed its trailing 12-month free cash flow into negative territory, with an outflow of US$42.4 billion.

Amazon is clearly seeing enormous demand for its services. The question is whether that demand will eventually justify the staggering investment required to meet it.

Investors appear to be losing patience with the idea that spending hundreds of billions of dollars today will automatically translate into enormous profits tomorrow.

Intel Corporation [NASDAQ:INTL] suffered an even more brutal reaction, plunging around 20% in after-hours trading after its fourth-quarter outlook fell well short of expectations.

Intel actually reported a reasonable third quarter. Revenue increased 21% to US$16.5 billion, while adjusted earnings of US$0.52 per share beat analyst forecasts.

But management forecast fourth-quarter revenue of just US$15 billion to US$16 billion, compared with market expectations of around US$17.1 billion. Adjusted earnings guidance of US$0.25 per share was also well below expectations.

The company warned that weakness in the PC market was proving worse than anticipated and could continue through the first half of 2027.

An explosion at its semiconductor manufacturing facility in Israel has compounded the problems, with an estimated US$600 million revenue impact spread across two quarters.

Intel is also facing substantial capital spending requirements as it attempts to rebuild its manufacturing capabilities and compete more effectively in the semiconductor industry.

The sell-off is particularly significant given that Intel shares had more than doubled this year. Investors had clearly priced in a substantial recovery, and the latest guidance suggests that recovery may be considerably bumpier than expected.

Twilio [NYSE:TWLO] was another casualty, falling around 15% despite reporting earnings and revenue above expectations.

Third-quarter revenue increased 20% to US$1.56 billion, while adjusted earnings of US$1.65 per share comfortably beat forecasts.

But management’s fourth-quarter guidance suggested organic revenue growth would slow from 16% to just 11–12%.

That was enough to trigger heavy selling, even though Twilio raised its full-year revenue, earnings and free cash flow forecasts.

Illumina [NASDAQ:ILMN] also fell approximately 12% after reporting better-than-expected results and lifting its full-year outlook.

The common theme running through these announcements is that the market’s tolerance for disappointment is rapidly disappearing.

Amazon is being punished for the enormous cost of its AI ambitions. Intel is being punished for a weaker outlook. Twilio and Illumina are being punished despite beating expectations.

When companies deliver reasonable results, and their shares still fall 10–20%, it tells you something important about market sentiment.

Investors are no longer prepared to pay almost any price for the promise of future growth. They want to see that growth translate into earnings and cash flow, and they want to see it sooner rather than later.

That is a dangerous environment for richly valued stocks carrying high expectations.

The Nasdaq is about to tip into a weekly downtrend, which will increase the odds of further falls in the next few weeks.

I’ve just noticed that oil prices are racing higher as I write this, with Brent crude oil up 2% to US$114/bbl. Clearly, there is some news out about the war in Iran.

I continue to see the possibility of oil prices going nuts above US$120/bbl.

Gold is resting on major support at $US4,000 and could see strong selling pressure if it gives way.

Money continues to flood into US bonds, with switching out of US tech stocks one of the main culprits.

You can’t even hide in crypto at the moment. A suspected hack of Binance, the world’s largest crypto exchange, prompted it to freeze more than $US2.5 billion ($3.5 billion) in assets and sent the price of digital tokens tumbling.

So, it’s all happening in market land, but the ASX 200 [ASX:XJO] is taking all the volatility in its stride, rising 1% in the morning session as banks and energy companies rise.

Charlie and I try to unravel that conundrum in today’s Closing Bell video while discussing all the above.

Closing Bell