As we enter the first earnings reporting season of calendar 2023, the sentiment in the stock market has changed, as the leading indices suffered significant double-digit percentage declines in 2022. The tech-heavy NASDAQ dropped over 33% last year, and the most diversified index, the S&P 500, fell by nearly 19.5%. The NASDAQ is the most volatile index as the companies in the composite are innovators. In 2021, it rose 21.39%, in 2020, the NASDAQ exploded 43.64% higher. In 2021, the NASDAQ underperformed the S&P 500, but far outperformed it in 2020.
Technology companies tend to offer promises that may or may not pan out and turn into profits. Companies like Apple ( Chart AAPL - $143.00 2.93 (2.008%) ), Microsoft ( Chart MSFT - $242.71 5.45 (2.196%) ), Amazon ( Chart AMZN - $100.55 1.70 (1.663%) ), Meta ( Chart FB - $0. 0.99 (0.506%) ), Alphabet ( Chart GOOG - $97.95 2.76 (2.741%) ), Tesla ( Chart TSLA - $166.66 11.24 (6.318%) ), and NVIDIA ( Chart NVDA - $191.62 12.03 (5.907%) ) are examples of NASDAQ stocks that delivered huge profits over the past years. However, when starting out, many of these companies posted quarterly losses and offered investors little more than promises.
After an ugly year in the stock market, with inflation at the highest level in decades and the potential for a looming recession, investors will be more selective in 2023.
“Show me the money” was the most famous line of the 1986 film Jerry Maguire, and in 2023 investors are picking stocks that show them the money as earnings are at the center of the stage. Blue skies from the past years, where promises and potential profits and growth attracted investors, have turned cloudy in 2023.
Two companies without profits that soared in 2021
- GameStop ( Chart GME - $21.25 1.57 (6.88%) ) moved 687.7% in 2021, with the shares moving from $4.71 at the end of 2020 to $37.10 per share on December 31, 2021.
- AMC Entertainment ( Chart AMC - $5.01 0.50 (9.074%) ) rose 1,183% in 2021, as the stock exploded from $2.12 on December 31, 2020, to $27.20 at the end of 2021.
- These high-profile meme stocks experienced explosive price moves in 2021.
Elevator down in 2022
- GME fell over 50% in 2022.
- AMC dropped over 85% last year.
- The lack of profits was not the only issue that took stocks lower in 2022.
Growth expectations ran out of steam
- AAPL, the U.S. company with the top market cap, dropped 26.8% in 2022.
- MSFT, the computer giant, fell 28.7% last year.
- TSLA, Elon Musk’s EV company that rose to the highest market cap in the car industry, plunged 65% in 2022.
Three factors making investors more selective
- Interest rates. Short-term rates rose 4.25% in 2022, increasing financial costs, weighing on earnings, and causing capital to flow from stocks to fixed-income assets. Higher rates cause cash to burn faster for companies without profits.
- Inflation and recession. Rising prices and supply chain issues caused input prices to rise, increasing products’ cost of goods sold and weighing on profits. The potential for a recession caused consumer purchases to begin to decline and the odds of layoffs to rise. Companies without profits or limited growth potential are cutting costs, likely increasing unemployment.
- Trends. The trend is always your best friend in all markets. In 2022, the stock market’s bearish price action and sentiment became a self-fulfilling prophecy.
Dark clouds make investors more selective
- Companies with profits and cash hordes have a better chance of survival.
- Dark clouds make blue-sky promises of earnings and growth far less compelling.
- Survival depends on selectivity in bear markets.
- The market is likely to continue companies that offer earnings excuses and reward those that show concrete results.
- The clouds will eventually dissipate, and blue-sky opportunities will emerge. Careful attention to risk-reward dynamics will separate winning from losing market participants.