Microsoft sprung a surprise downgrade on Wall Street on Thursday and the market didn’t fall out of bed, it rose.
That is very different to the reaction in May to the weak earnings reports from Walmart firstly and then Target which saw the whole market rattled and then a poor report from Snap sent more tremors through investors in late May.
Admittedly the Microsoft downgrade wasn’t huge, – a three or four cents a share and slightly weaker revenue, with the reason explained as currency fluctuations flowing from the recent strength of the greenback.
But it was a surprise from a leading megatech and the second biggest listed company in the US and one with a history of not surprising investors.
Wall Street’s mild reaction tells us that US investors are now in a more comfortable place even if they still jump at recession fears as we saw on Tuesday of this week.
The Fed is now seen to be in control of the battle to curb inflation (the US consumer price data for May is out next week) and the US central bank is widely expected to add another 0.50% rise to rates at its meeting in late June.
The surprise report saw Microsoft shares fall 3.8% in early trading Thursday but recover to be 0.79% higher at the close.
And Wall Street itself? The Dow added 435.05 points, or 1.3%, to close at 33,248.28. The S&P 500 rose 1.8% to 4,176.82 and the Nasdaq jumped 2.7% to 12,316.90.
Microsoft said in its update that said it now expects revenue of between $US51.94 billion and $US52.74 billion in its fourth fiscal quarter ending June 30, compared to previous forecasts of $US52.4 billion to $US53.2 billion.
Diluted earnings are now expected to be between $US2.24 and $US2.32 a share, down from the previous forecast of $US2.28 to $US2.35.
It is clear evidence that the strong performance of the US dollar in May has had a bigger impact than a lot of analysts thought.
In late April, Microsoft reported forecast-beating third-quarter results and an optimistic outlook for the current quarter. That changed very quickly.
But Thursday’s update highlights the currency risks for companies with significant overseas earnings, as central banks and governments around the world grapple with how to tackle rising prices and the possibility of recession.
The dollar has has risen this year thanks to the boost from interest rate rises in the US and the certainty of more to come from the Fed.
The flight to safety in the wake of the Russian invasion of Ukraine has also bolstered the greenback.
The dollar index, measuring it against a basket of currencies, is up around 6% since late 2021.
In its third quarter, Microsoft generated 49.8% of total revenue outside the US so a 6% rise in the dollar on that split would have a noticeable impact on the US dollar value of overseas revenues and earnings.
Microsoft is not alone in noting the impact of the stronger greenback – earlier this week Salesforce earlier this week blamed the strong dollar for its decision to cut its sales outlook for the year.
Analysts are now looking at the possible US dollar impact on the June quarter revenue and earnings for a host of other Wall Street companies with big offshore sales – Apple, Alphabet, Facebook, Amazon, IBM, Coca Cola, Starbucks, McDonald’s, Ford, GM and other consumer goods and products groups
