What happened
Wall Street opened the week on a somber note in the wake of a couple of high-profile economic reports issued late last week. The stock market was closed on Friday, so the impact of the data wasn't evident until stocks began trading on Monday. The Federal Reserve's ongoing battle with inflation and the stubborn resilience of the job market took center stage as investors digested the latest monthly jobs report and what it means for the direction of the economy.
With these developments as a backdrop, Amazon (AMZN -1.11%) slipped 0.7%, Microsoft (MSFT -0.50%) fell 1.2%, Alphabet (GOOGL -4.07%) (GOOG -3.93%) slumped 2.5%, and Apple (AAPL 1.91%) was down 2%, as of 12:45 p.m. ET.
A check of all the usual sources found nothing in the way of company-specific news about the tech giants, which suggests that the traders bidding them down were contemplating what the latest reports mean for the overall state of the economy.
Image source: Getty Images.
So what
The latest jobs report, courtesy of the U.S. Bureau of Labor Statistics, showed that total nonfarm payrolls increased by 236,000 on a seasonally adjusted basis during March, which was below economists' consensus forecast of 238,000. However, the unemployment rate was also lower than anticipated at 3.5%, compared to the 3.6% anticipated by economists.
The biggest takeaway from the report is the remarkable and ongoing resilience of the job market, which notched its 27th consecutive month of growth. Economists suggest that job creation will need to slow further before inflation will decline back to the Fed's target range.
Ordinarily, a stable job market is a positive condition, but it's viewed as problematic in times of high inflation. The Fed has been raising interest rates since March 2022 in an attempt to cool an overheated economy.
The report from the Bureau of Labor Statistics followed on the heels of a similar set of results from ADP's National Employment Report. That report, delivered last week, showed that private sector employment increased by 145,000 jobs in March, while annual pay increased by 6.9% year over year -- another sign of persistent inflation.
The Federal Open Market Committee is scheduled to meet early next month, at which time it will decide whether or not to increase the benchmark federal funds rate again. The central bank has raised interest rates nine times over the past year in its efforts to get inflation back down to its preferred range. A strong jobs report increases the likelihood that further rate increases will be necessary.
Now what
So what do a strong jobs report, rising interest rates, and high inflation have to do with our quartet of technology stocks?
- After a period of rapid growth in the adoption of digital retail, that trend has slowed to a crawl as inflation cuts into consumer discretionary spending. As a result, Amazon's sales growth has stagnated, but as the leading e-commerce company, it is well-positioned to rebound when the economy improves.
- More consumers are also choosing to forgo upgrading high-end products like Apple's iPhones, hanging onto their older smartphones for a while longer. This will likely continue until inflation wanes further.
- When economic times are tough, companies cut their spending to preserve capital. Since advertising is an easy expense to dial down or ramp up in light of changing economic conditions, it's one of the first things to get cut. Alphabet, which earns the bulk of its revenue from digital advertising and ad tech services, is particularly susceptible to economic downturns because of this. But as it's the world's largest seller of digital advertising space, it will also rebound with the broader economy.
- Microsoft, with both consumer and business-facing segments, is also somewhat vulnerable to the downturn in the economy, but will quickly recover when headwinds subside.
The dark clouds hanging over the economy do have a silver lining: Investors can buy shares of these industry leaders at discounted valuations. Apple, Microsoft, Alphabet, and Amazon are trading down 11%, 16%, 29%, and 46%, respectively, from their late 2021 peaks.
Data by YCharts
For bargain hunters, Amazon is by far the cheapest among this foursome, selling for just 1.6 times next year's sales. For context, most experts agree a reasonable price-to-sales ratio is between 1 and 2. Microsoft, Apple, and Alphabet still have some optimism baked into their valuations, selling for 9 times, 6 times, and 4 times next year's sales, respectively. However, given their industry-leading positions and histories of strong and stable growth, I would argue that now is the time to buy shares of all these stalwarts in advance of the recovery to come -- particularly since they are cheaper than they've been in years. The stocks could still go lower, but will almost certainly be higher in years to come.
For investors who are able to withstand the current stomach-churning short-term volatility and who expect to be able to hold onto their shares for at least three to five years, these technology stocks represent clear buying opportunities.
