Martin Gamble on US markets: Microsoft shines as Meta and Apple feel the strain

US stock markets had a see-saw week, initially sitting on losses before Microsoft’s results helped boost sentiment and push indices higher.

At one point the Nasdaq 100 index had entered correction territory after dropping more than 10% from the prior peak.

Stocks were dragged lower by rising long-term bond yields with 30-Year treasury yields reaching their highest levels since 2007, after touching 5.24%.

The ‘vigilantes’ style spike in yields was sparked during the press conference following the Federal Reserve’s decision to keep interest rates on hold, as markets became sceptical of Kevin Warsh’s commitment to fighting inflation.

Apart from the big gains for Microsoft, Chipotle Mexican Grill was in demand as it beat expectations and raised its outlook. Elsewhere, wearable fitness tech outfit Garmin was boosted by record revenue.

On the other side of the coin memory stock SanDisk continued to face profit taking, while climate control specialist Lennox International was hit by weakness in residential markets.

Microsoft cloud growth accelerates

Microsoft saw its shares jump as much as 15% after the enterprise software giant reported its strongest revenue growth in four years driven by its Azure cloud division.

Azure’s 43% growth in the quarter pushed annual sales above $100 billion for the first time. Looking ahead, chief financial officer Amy Hood projected further growth of 45% for the upcoming quarter.

Another positive feature of the earnings update for shareholders was that Microsoft’s capital expenditures were lighter than expected.

Microsoft spent $41 billion on capex in the fourth quarter which was below analysts’ forecasts of $42.4 billion while the company’s $50 billion projection for the next quarter came in below market expectations of $56 billion.

Microsoft reported free cash flow of $19.6 billion, down around 23% but ahead of analysts’ estimates of $13.4 billion.

Evidence for monetisation of AI spending was seen in the number of paid Copilot seats which expanded by 10 million to 30 million, a 50% sequential jump from 20 million seats in the prior quarter, and ahead of market forecasts of 27 million.

Meta investors recoil at AI spending

Meta CEO Mark Zuckerberg insists there isn’t enough compute capacity to satisfy demand which, he believes justifies increased AI capital expenditures.

The problem is that investors aren’t convinced the heavy spending will deliver adequate returns on investment.

Those worries and a weaker than expected revenue outlook contributed to Meta shares falling by as much as 10% despite the company reporting second quarter earnings above analysts’ estimates.

The Instagram owner raised its full year guidance for capital expenditures to $137.5 billion at the middle point of the new range as well as increasing projected operating costs.

Second-quarter free cash flow dropped by 90% to less than a billion dollars, the lowest amount since the third quarter of 2022.

On the plus side Meta showed increasing customer engagement across its platforms with family daily active users increasing 3% year-over-year to around 3.6 billion while Instagram achieved two billion daily active users.

The shares are down 23% over the last year compared with an 18% gain in the Nasdaq Composite index and have now underperformed the technology-focused benchmark over the past five years.

Apple hit by supply chain costs and constraints

This was not the ideal way for Tim Cook to sign off as Apple’s chief executive, with a softer outlook and rising supply-chain costs overshadowing otherwise solid quarterly numbers.

Revenue came in at $109.42 billion, ahead of the $108.65 billion consensus forecast, while EPS of $2.02 compared with expectations of $1.89, albeit helped by tariff rebates.

However, guidance for the September quarter disappointed. Apple expects revenue growth of 9% to 11%, below Wall Street’s 12% forecast, with iPhone revenue growth in the mid-teens versus expectations of 17.6% and gross margin guided to 47% to 48%.

There were still bright spots. iPhone sales rose strongly in the second quarter to $54.25 billion, ahead of forecasts, suggesting newer models continue to resonate with consumers. Mac revenue also beat expectations, but Services revenue of $30.74 billion fell short of the $31.22 billion forecast.

China remained a weak point, even if there were signs of improvement. The wider concern is that demand is not the issue; instead, higher memory costs and limited supply-chain flexibility are constraining Apple’s momentum.

Incoming chief executive John Ternus inherits an enviably cash-generative business, but also one facing tougher component costs, scrutiny over AI progress and elevated investor expectations.