U.S. stocks trade slightly lower after Microsoft’s disappointing outlook fuels recession fears

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The Dow eked out a gain Wednesday, but the S&P 500 and Nasdaq closed lower after disappointing earnings guidance from Microsoft Corp. added to concerns about corporate profits and a slowing economy.

How stocks traded

  • The S&P 500 shed 0.73 points, leaving it nearly flat at 4,016.22
  • The Dow Jones Industrial Average gained 9.88 points, or less than 0.1%, to end at 33,743.84
  • The Nasdaq Composite fell 20.91 points, or 0.2%, to finish at 11,313.36

On Tuesday, the Dow Jones Industrial Average rose 0.3%,the S&P 500 declined 0.1%, and the Nasdaq Composite dropped 0.3%.

What drove markets

U.S. stock indexes closed modestly lower Wednesday, except for the Dow, which closed fractionally higher, as investors weighed fourth quarter corporate earnings reports from technology behemoths and awaited next week’s Federal Reserve interest-rate decision.

Microsoft shares shed 0.6% on Wednesday after tumbling as much as 5% earlier in the session in the wake of delivering mostly better-than-expected earnings figures. But the company’s chief financial office Amy Hood also warned of softening demand for its cloud services amid an economic slowdown.

Hood said in a conference call late Tuesday that the company expects the downward business trends witnessed at the end of 2022 to continue into the current quarter, while projecting revenue to come in roughly $1 billion or more lower than Wall Street expects.

The company’s guidance is “what has been expected in an environment where consumers face higher costs on a large array of products,” said Kevin Philip, partner at Bel Air Investment Advisors. “With the high level of uncertainty, they’re reining in discretionary income, and they don’t have as much cushion as the stimulus measures that were enacted during the COVID era.”

Microsoft’s March-quarter earnings guidance also raised questions about the rally to kick off 2023.

“U.S. stocks are declining after a couple of major tech warnings are making traders nervous of a macro slowdown,” Edward Moya, senior market analyst at Oanda wrote. “Tech earnings from Microsoft to Texas Instruments clearly painted a picture of a macro slowdown. The January rally might be over if the rest of the big-tech earnings and multi-nationals paint the same downbeat picture.​”

Opinion: Microsoft gave Wall Street hope, but then the cloud forecast turned dark

Quincy Krosby, Chief Global Strategist for LPL Financial, said the stock market’s harsh reaction means the guidance is becoming “even more important than it was before Microsoft earnings call.”

“It has been said so many times that corporate guidance during this fourth quarter earnings season is crucial for understanding the direction of the market, especially amid a backdrop of weakening economic data.”

The tech-rich Nasdaq Composite Index is up 8.1% for the year to date as investors made bets some of the big names had been sold down too much in the wake of the 2022 bear market.

So far, more than 19% of the S&P 500 companies have reported fourth-quarter earnings, and 68% of them posted stronger-than-expected results, according to FactSet.

Companies stepping up to the plate on Wednesday after the closing bell include: Tesla AT&T IBM ServiceNow Lam Research CSX Abbott Wynn and Nasdaq

See: U.S. economy ended 2022 on solid footing, GDP to show. But a recession might loom.

Companies in focus

  • AT&T shares finished 6.6% higher Wednesday as the company swung to a loss upon taking restructuring charges, but beat earnings expectations on an adjusted basis and showed continued subscriber growth in its fourth quarter.
  • Texas Instruments slipped 1.1% after just beating profit estimates and providing an acceptable outlook amid low demand for consumer electronics.
  • Boeing Co. stock rose 0.3% after the aerospace giant reported an unexpected loss due partly to high expenses as it shapes plans to increase production of its 737 and 787 planes.
  • News Corp shares jumped 5.7% after Rupert Murdoch ditched plans to merge the two companies, a proposition that met pushback from shareholders.
  • Norfolk Southern Corp. shares tanked 5.1% after the company reported Wednesday fourth-quarter profit that came up shy of forecasts, as railway expenses rose more than revenue, which topped forecasts.
  • Tyson Foods shares went up 0.9% after its chief financial officer, John R. Tyson, pleaded guilty to public intoxication and criminal trespassing charges levied against him from a November arrest. As part of the guilty plea, he agreed to pay a total of $440 in fines and fees, according to The Wall Street Journal.

—Jamie Chisholm contributed to this article.

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