Economic conditions are deteriorating | InvestorPlace


Snapchat Investors Crushed… Has the Entire Economy Worsened in the Last Four Weeks? …a Fed hawk looks slightly dovish…do we see the basis for a “dovish pivot”?

Yesterday, Snapchat’s stock took a beating, plummeting 43% in a single day.

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

All of that disappeared on Monday night when the company unexpectedly announced that it was in danger of missing those revenue and EBITDA forecasts. It will also slow down hiring and spending.

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

*** So much can change in just one month

Since The Wall Street Journal:

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

“There’s a lot to manage in the macro environment today,” chief executive Evan Spiegel told a JP Morgan Chase & Co conference on Monday.

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

It is important.

In just one month, SNAP’s conditions have deteriorated so badly that management is confident its second-quarter results won’t measure up — and that’s despite more than five weeks remaining for a potential rebound.

Additionally, there are more than nine weeks left before SNAP management is due to provide commentary and guidance on upcoming quarterly performance.

Let it sink in.

SNAP’s next earnings announcement is estimated around July 28, more than nine weeks away.

And yet, in just four weeks since SNAP provided its first-quarter financial estimates, things have gotten so bad that it’s throwing in the towel and reporting disappointment.

So is it just poor trade execution at SNAP? Or is it the proverbial canary in the coal mine, suggesting bigger problems for the sector?

From research store Piper Sandler: “At this point, our feeling is that it’s more macro and industry focused than Snap.”

From Citi: “…A macro downturn is likely to impact advertising results across the Internet sector, although we believe that platforms more exposed to brand advertising, such as Twitter, Google’s YouTube and Pinterest, are probably more impacted overall.”

From Jefferies: “I think SNAP [earnings preannouncement] is not specific to SNAP. We believe this is an industry-wide advertising trend. Businesses continue to see advertising disappear as the first thing you see during an economic downturn. »

*** We are seeing a decline in forecasts in virtually all areas

FactSet is the earnings data analytics company used by professionals. Last Friday, here is their Q2 business forecast data:

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

In terms of corporate earnings forecasts, 70% of S&P 500 companies (62 out of 88) that issued Q2 2022 EPS forecasts issued negative forecasts.

As an illustration, we can look at Walmart and Target from their earnings announcements last week.

Walmart now anticipates a 1% contraction in full-year earnings, down from mid-single-digit growth in the last quarter.

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

Meanwhile, Best Buy yesterday lowered its full-year high and low guidance. And Abercrombie & Fitch lost around 30% as its first-quarter performance and outlook disappointed investors. This morning, Dick’s Sporting Goods cut its financial outlook for its fiscal year.

We are seeing a marked acceleration in the headwinds facing parts of the economy, as well as a tightening of the purse strings from more price-sensitive buyers.

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

What will be critical to watch is the second quarter earnings season which begins in mid-July. Yes, markets have repriced assets to reflect today’s inflationary environment and a hawkish Fed. But it’s not yet clear how earnings multiples will be affected if second-quarter earnings fall short of expectations.

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

So if actual earnings are lower than estimated earnings, it would instantly make some of today’s reasonable valuations expensive. And that would likely mean more pressure on stocks that are posting disappointing numbers, regardless of how low they are today.

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

St. Louis Fed Chairman James Bullard has been the most hawkish Fed Chairman. In the past Summarieswe pointed out how it was Bullard who called for a single 0.75% hike.

Last Friday, in an interview with fox business, Bullard sounded optimistic. He even pointed to upcoming rate cuts.

Since fox business:

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

He noted that people want “to be on the go and that’s going to lead to high consumption this year.”

Bullard was asked about his earlier call for a 0.75% hike. This time he had a different approach:

Fifty basis points is a good plan for now. I think as always, we need to pay attention to incoming data on the economy and on inflation, and we will in the future.

Bullard went on to say that he wanted to bring the rate to 3.5% by the end of the year. That’s higher than most other Fed chairs. But Bullard thinks the more the Fed can accelerate its hikes to kill inflation, the more room it will have to cut rates to help any collateral damage to the economy.

Return to fox business for these details:

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

Obviously, we’ll take “could go down” with a grain of salt the size of SNAP’s market crash yesterday. That said, it’s a good sign coming from the most hawkish member of the Fed.

And that raises an important question…

*** Are we beginning to see the foundations of the Fed’s “dovish pivot” that Luke Lango predicted?

For new readers, Luke is InvestorPlace’s hypergrowth expert. It focuses on cutting-edge technology innovators and disruptors who are transforming our world – and have the potential to dramatically transform a portfolio.

Of course, the tech leaders are in a brutal bear market. So the bigger question is: when will things change?

It was almost a month ago to the day that we presented Luke’s roadmap with his answer. Here it is, from our April 26 Digest:

  1. Inventories are expected to fall further in May; 2) the Fed is likely to become dovish by the summer; and 3) stocks will begin to rebound ahead of the dovish pivot.

So far, we see things unfold as Luke predicted.

We have seen stocks continue to fall…

We have just highlighted Bullard’s somewhat more pacifist comments. Moreover, he is not the only Fed Chairman with this change in tone.

On that note, let’s get to Luke’s Monday Daily Notes of his Early-stage investor a service:

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

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

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

This means that we are just waiting for the eventual rebound from the tech leaders before an official dovish pivot.

Let’s go back to Luke’s roadmap for more details on how everything will fit together:

This is an accommodative Fed by nature. They are now acting like hawks. But it’s all just action.

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

And it looks like the data will give him a reason to do so by June/July.

At that time, inflation will decrease. Economic expansion will slow and inventories will decline.

This will be enough negative backdrop to induce the Fed to ease its tightening cycle. The shares will then rise.

Indeed, we believe this dovish pivot will pave the way for a meltdown of more than 25% of the entire stock market through mid-2023.

*** So, to conclude, let’s follow all the breadcrumbs…

The macro environment continues to tighten – even though the Fed wants that… This is translating into disappointing earnings, leading to more market pain, which is to be expected… However, we are seeing the very first green shoots of a dovish change from the Nourished…

Combine all of this with some elite tech stocks that are down 60%, 70%, or even 80%+, and it creates a huge buying opportunity.

Don’t rush to place your chips – there’s no way of knowing how low the market will go.

But if you don’t have a tech stock buy list ready, it’s time to create your own. If you want 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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