Disappointing Meta Earnings Sends Shudders Through Stock Market
Tech stocks have been ‘priced way beyond perfection’ and now face scrutiny as interest rates are poised to rise.
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Facebook’s parent company shed more than $230 billion in market value Thursday, a one-day loss that is the biggest ever for a U.S. company and increases pressure on a stock market long powered by technology shares.
Meta Platforms Inc. (formerly known as Facebook Inc.) gave a disappointing financial forecast, helping the major indexes snap a four-session winning streak. The tech-heavy Nasdaq Composite index dropped 3.7%, its worst day since September 2020, while the S&P 500 fell 2.4%.
PayPal Holdings Inc. and Spotify Technology SA also spooked investors in recent days, when the payments giant lowered its 2022 profit outlook and the streaming company elected not to provide annual guidance. Both companies suffered sharp drops in their stock prices.
The setbacks reflect the increased scrutiny companies are under as major U.S. stock indexes remain near record highs and the Federal Reserve is preparing to raise interest rates for the first time since 2018. Rising rates tend to reduce the multiples that investors are willing to pay for a share of company profits, a trend that stands to mean pain for stocks already trading at lofty valuations. That has put heightened pressure on the companies to show their financial results justify their price tags. In recent days, several have fallen short, raising concerns among investors that further declines in major indexes could lie ahead.
“The level of forgiveness has gone down,” said Daniel Genter, chief executive and chief investment officer at RNC Genter Capital Management. “When boards come to their shareholders to confess their sins, they’re just not going to be pardoned with one Hail Mary.”
The Facebook parent company surprised investors with a deeper-than-expected decline in profit and a downbeat outlook. The company said it expects revenue growth to slow and shared that it lost about one million daily users globally. Shares declined 26%, their worst daily performance since they started trading in 2012.
The company’s challenges include a new ad-privacy policy from Apple Inc. that Meta expects to cost it more than $10 billion in lost sales for 2022. The requirement that apps ask users whether they want to be tracked limited the ability to gather data used to target digital ads, driving advertisers to change their spending.
Meta’s $232 billion drop in market value exceeds the record that Apple Inc. set in September 2020 when the iPhone maker lost about $182 billion in a single day, according to Dow Jones Market Data.
Some strategists said the recent slide in shares of speculative tech companies should serve to remind investors that a robust market rally relies on advances by a variety of stocks. And they warn they expect more big stock swings ahead at any hint of slowing growth.
“The market can’t just be driven by a small number of megacap companies or tech companies,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. “There should start to be more of a recognition that it’s not going to be technology that leads us out of this pullback.”
Earnings season had been overshadowed until recent days as investors fretted over the Fed’s plans to raise rates. They sold stocks across sectors, helping to send the S&P 500 down 5.3% in January, its worst monthly performance since the March 2020 slump.
Results out of the tech segment haven’t been all bad. Google parent Alphabet Inc. reported robust sales growth and unveiled plans for a stock split this week, helping the company add more than $135 billion in market value Wednesday. And Amazon.com Inc. said after Thursday’s closing bell that profits nearly doubled in the holiday period, helping send its shares up about 15% in late trading.
Shares of Snap Inc. and Pinterest also got a big bump after hours. Snap posted its first quarterly profit, and Pinterest said it expects first-quarter revenue to grow sharply. All three stocks had declined in the regular session ahead of the reports.
Meta, PayPal and Spotify entered 2022 at rich valuations. While the S&P 500 ended December trading at 21.5 times its projected earnings over the next 12 months, Meta was trading at 23.6 times, PayPal at 36 times and Spotify at 543.9 times, according to FactSet. Spotify isn’t an index constituent. By Thursday, Meta’s multiple had pulled back to 18 times forward earnings, while PayPal traded at 25.6 times. Spotify, meanwhile, traded at 666.2 times, after analysts cut their earnings forecasts.
“Those stocks were really priced way beyond perfection,” Mr. Genter said. “People are saying, well, guess what, perfection is not here.”
PayPal lowered its profit outlook for 2022 and abandoned a target it set last year of roughly doubling its active user base. Executives said business this year will be pressured by forces including inflation, supply-chain problems, the Omicron variant and the runoff in government stimulus. Shares slumped 25% Wednesday in their worst selloff on record and continued sliding Thursday.
And Spotify, which is embroiled in a controversy over Joe Rogan’s podcast, said it added users but declined to give annual guidance, pulling shares down 17% on Thursday.
Broadly, the corporate earnings season has surpassed expectations. With results in from about half the constituents of the S&P 500, analysts estimate that profits from index constituents rose 29% in the holiday quarter from a year earlier, according to FactSet. That is up from forecasts for 21% growth at the end of September.
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President Donald Trump’s imposition of tariffs on trading partners have moved analysts to reduce forecasts for U.S. companies. Many stocks look vulnerable to declines, while some seem relatively immune.
Since the start of the year, analysts’ expectations for aggregate first-quarter sales of S&P 500 component companies have dropped about 0.4%, according to FactSet. The hundreds of billions of dollars worth of imports from China, Mexico, and Canada the Trump administration is placing tariffs on, including metals and basic materials for retail and food sellers, will raise costs for U.S. companies. That will force them to lift prices, reducing the number of goods and services they’ll sell to consumers and businesses.
This outlook has pressured first-quarter earnings estimates by 3.8%. Companies will cut back on marketing and perhaps labour, but many have substantial fixed expenses that can’t easily be reduced, such as depreciation and interest to lenders. Profit margins will drop in the face of lower revenue, thus weighing on profit estimates. The estimates dropped mildly in January, and then picked up steam in February, just after the initial tariff announcements.
“We are starting to see the first instances of analysts cutting numbers on tariff impacts,” writes Citi strategist Scott Chronert.
The reductions aren’t concentrated in one sector; they’re widespread, a concrete indication that the downward revisions are partly related to tariffs, which affect many sectors. The percentage of all analyst earnings-estimate revisions in March for S&P 500 companies that have been downward this year has been 60.1%, according to Citi, worse than the historical average of 53.5% for March.
The consumer-discretionary sector has seen just over 62% of March revisions to be lower, almost 10 percentage points worse than the historical average. The aggregate first-quarter earnings expectation for all consumer-discretionary companies in the S&P 500 has dropped 11% since the start of the year.
That could hurt the stocks going forward, even though the Consumer Discretionary Select Sector SPDR exchange-traded fund has already dropped 11% for the year. The declines have been led by Tesla and Amazon.com , which account for trillions of dollars of market value and comprise a large portion of the fund. The average name in the fund is down about 4% this year, so there could easily be more downside.
That’s especially true because another slew of downward earnings revisions look likely. Analysts have barely changed their full-year 2025 sales projections for the consumer-discretionary sector, and have lowered full-year earnings by only 2%, even though they’ve more dramatically reduced first-quarter forecasts. The current expectation calls for a sharp increase in quarterly sales and earnings from the first quarter through the rest of the year, but that’s unrealistic, assuming tariffs remain in place for the rest of the year.
“The relative estimate achievability of the consumer discretionary earnings are below average,” Trivariate Research’s Adam Parker wrote in a report.
That makes these stocks look still too expensive—and vulnerable to declines. The consumer-discretionary ETF trades at 21.2 times expected earnings for this year, but if those expectations tumble as much as they have for the first quarter, then the fund’s current price/earnings multiple looks closer to 25 times. That’s too high, given that it’s where the multiple was before markets began reflecting ongoing risk to earnings from tariffs and any continued economic consequences. So, another drop in earnings estimates would drag these consumer stocks down even further.
Industrials are in a similar position. Many of them make equipment and machines that would become more costly to import. The sector has seen about two thirds of March earnings revisions move downward, about 13 percentage points worse that the historical average. Analysts have lowered first-quarter-earnings estimates by 6%, but only 3% for the full year, suggesting that more tariff-related downward revisions are likely for the rest of the year.
That would weigh on the stocks. The Industrial Select Sector SPDR ETF is about flat for the year but would look more expensive than it is today if earnings estimates drop more. The stocks face a high probability of downside from here.
The stocks to own are the “defensive” ones, those that are unlikely to see much tariff-related earnings impact, namely healthcare. Demand for drugs and insurance is much sturdier versus less essential goods and services when consumers have less money to spend. The Health Care Select Sector SPDR ETF has produced a 6% gain this year.
That’s supported by earnings trends that are just fine. First-quarter earnings estimates have even ticked slightly higher this year. These stocks should remain relatively strong as long as analysts continue to forecast stable, albeit mild, sales and earnings growth for the coming few years.
“This leads us to recommend healthcare and disfavour consumer discretionary,” Parker writes.
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