The slowing growth and stubborn inflation picture emerging in the U.S. economy may not be quite a nightmare scenario for the Federal Reserve, but it at least could make for some restless sleep.

First-quarter results released Thursday showed the U.S. economy slugging along at a 1.6% annualized pace, the slowest in almost two years, and inflation running nearly double where it was in the previous quarter and at the highest level in a year.

The two data points put together spell at least a mild stagflationary environment that will make policymaking troublesome in the weeks and months ahead. Stagflation, characterized by stagnant economic growth and high inflation, presents a challenging environment for businesses. It's difficult for companies to grow their earnings in such an environment, which can weigh on stock prices.

A sluggish economy typically translates to lower corporate earnings growth, which is a key driver of stock prices. If companies are not growing as fast as expected, investors may become less willing to pay high prices for their stocks.

On the other hand, inflation erodes the purchasing power of consumers and reduces corporate profit margins. Companies may struggle to pass on higher costs to consumers if they are unable to raise prices, leading to lower profitability. Additionally, rising inflation may prompt central banks to tighten monetary policy, not rate cuts as some people expect to come this year. 

The combination of slowing growth and rising inflation creates uncertainty about the future direction of the economy and corporate profits. Investors typically dislike uncertainty, which can lead to increased market volatility as investors reassess their expectations and risk tolerance.

Meta: Slightly bearish as key support level could be broken 

This week, the tech giant’s stock broke below its 50-day moving average, as it sold off with investors questioning Meta’s upside potential amid excessive spending on artificial intelligence.  A break below support around $405, however, would indicate additional waves of selling pressure and a likely test of the 61.8% retracement level around $375. This would also mean a retest of the 200-day moving average, which META has not touched since February 2023.

META (Daily). Experiencing huge gap, Meta is aiming the 200-Moving Average level in 375.00. Short position after closing the previous gap in 454.00.

Microsoft: Slightly bullish as AI remains the catalyst

Microsoft's fiscal third-quarter results showcased significant growth across various segments, particularly in its Intelligent Cloud division. Revenue increased by 17% year over year, reaching $21.94 billion in net income, which translates to $2.94 per share.

Looking ahead, Microsoft's finance chief, Amy Hood, provided guidance for the fiscal fourth quarter, forecasting $64 billion in revenue, slightly below the $64.5 billion LSEG consensus. However, this projection still indicates a robust operating margin of 42.3%, surpassing the consensus of 41.5%.

One notable aspect contributing to Microsoft's growth is the increasing demand for AI-related services, which has outpaced the company's current capacity. To address this, Microsoft has been investing in capital expenditures to secure Nvidia graphics processing units for AI training and deployment.

Within the Intelligent Cloud segment, revenue from Azure and other cloud services grew by 31%, surpassing analyst expectations. The growth in Azure was particularly driven by AI-related services, which accounted for 7 percentage points of the overall growth, indicating a strong demand for AI capabilities among businesses.

MSFT (Weekly). Even with the narrowing tunnel width, Microsoft is still on a long upward trajectory. Potential buy at the support level of 400.50.

Alphabet: Slightly bullish as earnings are resilient 

Alphabet's strong performance in the latest quarter, with revenue growing by 15% and YouTube ad sales jumping by 20%, indicates robust growth in its advertising business. This growth rate is the fastest since early 2022, demonstrating the company's resilience and ability to capitalize on digital advertising trends.

However, the mention of questions surrounding the future of Google's online ads due to the rise of generative AI services like OpenAI's ChatGPT suggests a potential area of concern. As these AI services evolve, they could present new ways for consumers to access information, potentially impacting traditional search-based advertising revenue streams.

In terms of the stock, the positive earnings report, especially with strong growth in YouTube ad sales, may initially buoy investor confidence. However, the potential challenges posed by evolving AI services to Alphabet's core search advertising business could introduce uncertainty and possibly dampen long-term investor sentiment.

Investors may closely monitor Alphabet's efforts to adapt to these changes, including innovations in advertising technologies and diversification strategies beyond search-based advertising. The company's ability to navigate this evolving landscape effectively will likely influence its stock performance in future.

GOOGL (Weekly). Rising on a large timeframe with the tunnel width increasing, Google is confirmed to be in a Bullish phase. Potential correction to the 14x level.

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Fullerton Markets Research Team

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