It was a mixed session for stocks Wednesday as investors mulled over the latest round of corporate earnings.
Tech stocks handily outperformed thanks to solid earnings reports from blue chip stocks Alphabet (GOOGL) and Microsoft (MSFT), though a hurdle in the latter's merger plans with Activision Blizzard (ATVI) sent shares of the video game maker tumbling.
Alphabet and Microsoft kicked off a busy stretch of earnings after last night's close when the two tech giants disclosed their quarterly results. Google's parent company Alphabet reported first-quarter earnings of $1.17 per share on $69.8 billion in revenue, with both figures topping analysts' estimates, thanks in part to solid ad revenue. GOOGL was up 2.4% at its session peak, but ended the day down 0.1%.
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Microsoft, meanwhile, reported fiscal third-quarter earnings of $2.45 per share on $52.9 billion in revenue, beating analysts' estimates. The company also said revenue from its cloud service Azure came in higher than expected, and it projected stronger-than-anticipated current-quarter revenue. MSFT jumped 7.2% on "AI optimism" and a "consumer business that is much stronger than originally feared," says David Wagner, portfolio manager at Aptus Capital Advisors, an Alabama-based registered investment advisor.
Just hours after Microsoft reported earnings, though, U.K. regulators blocked the software company's pending acquisition of Activision Blizzard, citing concerns it will stifle cloud gaming competition. The nearly $69 billion deal was first announced in January 2022. While MSFT managed to brush off the news, ATVI stock tumbled 11.5%.
"Microsoft needs this deal to help stoke growth in the wake of disappointing personal computer sales, with the gaming market a far more high-growth area, which would supplement the group's leading AI position," says Sophie Lund-Yates, lead equity analyst at U.K.-based financial service firm Hargreaves Lansdown. As such, the company could use its more than $50 billion of net cash "languishing on the balance sheet" to appeal the decision, she adds.
As for the major indexes, the tech-heavy Nasdaq Composite climbed 0.5% to 11,854. The broader S&P 500, on the other hand, slipped 0.4% to 4,055, while the blue chip Dow Jones Industrial Average fell 0.7% to 33,301.
How investors can stay defensive
While the earnings calendar continues to be on investors' immediate radar, the next Fed meeting is right around the corner. Fed funds futures are currently pricing in a roughly 76% chance the Federal Reserve will raise interest rates by 25 basis points (0.25%) at its May gathering, followed by a pause in June and potential rate cuts this fall.
But while "investor optimism has been building as we likely approach the end of the current rate-hike cycle," says Chris Haverland, global equity strategist at Wells Fargo Investment Institute, it would be prudent for market participants to stay defensive – particularly with a potential recession looming later this year. This can be done by targeting the best dividend stocks, as well as the best consumer staples stocks and the best healthcare stocks, which are two traditionally defensive sectors.
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