What happened
The biggest driver of the stock market roller-coaster ride in 2022 has been concerns about the economy and what it means for the future. An overheated economy has been pushing inflation higher, and investors have been watching economic reports closely for signs the tide has turned. A key economic indicator released on Thursday added more clarity, but unfortunately, the news wasn't what investors were hoping to hear.
With that as a backdrop, Alphabet (GOOGL +1.71%) (GOOG +2.00%) fell 2.4%, Amazon (AMZN +0.34%) was off 3.2%, and Microsoft (MSFT +0.60%) slumped 3.3% as of 11:10 a.m. ET on Thursday.
To be clear, there was very little in the way of company-specific news, driving Alphabet, Amazon, and Microsoft stocks lower today. This supports the conclusion that investors are reacting to the ongoing battle to right the economy without tipping the country into a recession.
Image source: Getty Images.
So what
The U.S. Bureau of Economic Analysis released its revised assessment on the state of the economy, which showed that growth in the third quarter was more robust than originally believed. The report showed that gross domestic product (GDP) growth in the third quarter of 2022 increased at an annual rate of 3.2%, up from its initial read of 2.6% and a subsequent revision to 2.9%. This followed declines of 1.6% and 0.6%, respectively, in the first and second quarters.
The report noted that the increase in the third quarter was the result of rising exports, resulting in a narrower trade deficit, as well as higher spending by both consumers and governments.
NASDAQ: GOOGL
Key Data Points
The news comes at a crucial time, as the Federal Reserve Bank recently suggested that it might ease its ongoing campaign of rising interest rates designed to control inflation. Higher interest rates cause borrowing to be more expensive, and business and consumers alike tend to cut spending. This helps to slow demand, which in turn results in falling prices, thereby taming inflation.
Unfortunately, the economy is a complex mechanism, and attempts to change course are imprecise at best. The Fed wants to slow an overheated economy without slowing it too quickly, or it risks bringing about an unintended recession.
Two successive quarters of declining GDP is the most widely accepted definition of a recession. This suggests that the economy briefly entered a downturn earlier this year, before rebounding last quarter. However, given the strength of the recent data and the Fed's commitment to tame inflation, some economists fear an additional contraction might be in the cards for 2023.
Furthermore, we still don't know if the economy has officially slipped into recession. That call is made by eight economists at the National Bureau of Economic Research. The panel considers a laundry list of economic indicators, including real personal income, industrial production, retail sales, and nonfarm payrolls, before issuing its final decision, which historically has been made well after a recession is over.
NASDAQ: AMZN
Key Data Points
Now what
So what does this have to do with our three technology stalwarts?
- Uncertainty about the future can cause a pullback in consumer spending, which would hurt e-commerce purchases on Amazon's platform, while also impacting Microsoft's sale of technology products.
- Businesses have already been reining in spending to shore up their reserves in the event of a recession. Marketing budgets are among the first to feel the pinch, which could hurt both Alphabet's and Amazon's digital advertising revenues.
- Enterprises could also slow their digital transformation plans, which could ultimately slow the adoption of cloud computing. As the three leaders in cloud infrastructure services, Amazon Web Services, Microsoft Azure, and Google Cloud could all take a hit.
But even as the overall economic picture remains cloudy, investors with the fortitude and resources should continue to buy best-in-breed companies like Alphabet, Amazon, and Microsoft, as each has a long history of surviving previous downturns and emerging as stronger businesses on the other side.
NASDAQ: MSFT
Key Data Points
Furthermore, their rich sticker prices of just a year ago have given way to much more reasonable price tags, with valuations not seen in years. Microsoft, Alphabet, and Amazon are currently trading for 7 times, 3 times, and 2 times next year's sales, when a reasonable price-to-sales ratio is between 1 and 2. That makes Amazon the clear bargain among the three, but investors have previously rewarded each stock with a premium valuation due to a history of strong growth and equally robust future prospects -- so I would argue that all three are buys right now.
For investors with a long-term outlook, buying shares of these innovative, industry-leading companies while their valuations are depressed represents a clear opportunity to generate impressive gains over the coming three to five years.
