US Equities send Wall St Index Lower

Posted on | July 26, 2009 |

Wall Street has been shedding some of yesterday’s gains this afternoon, as disappointing results from Microsoft, Amazon and American Express knocked the shine off US equities.

Microsoft plunged 10.6% to $22.85 within the first hour of trading after failing to live up to the market’s expectations. The world’s largest software maker last night revealed that its fourth-quarter sales slumped 17% to $13.1 billion from the same quarter a year ago – the first decline in sales since the company went public in 1986, and below Bloomberg’s expectations of $14.5 billion.

Quarterly net profits also trailed consensus forecasts, slumping 29% to $3.1 billion, or 34 cents a share. The company, which makes most of its profit by selling its Windows operating system and business software such as Office, explained that its results were attributable to weaker global demand for personal computers.

A closer look at Microsoft’s report revealed that sales across all of Microsoft’s main revenue generators suffered, with sales in its Windows division plunging 29% to $3.11 billion – this is the third straight quarterly decline in sales from this unit.

‘Our business continued to be negatively impacted by weakness in the global PC and server markets,’ explained Chris Liddell, the chief financial officer at Microsoft. He highlighted progress the company had made in cutting costs. ‘In the light of that environment, it was an excellent achievement to deliver over $750 million of operational savings compared to the prior year quarter.’ [1] Mr Liddle also warned of continuing pressure on profit margins throughout the year.

Internet advertising company Yahoo, which is said to be in discussions with Microsoft over the combining of their internet search operations, also was also in the red today, down 1.44% to $17.11.

Amazon, the world’s largest Internet retailer, which recently announced that it will acquire online shoe retail Zappos.com, was also among the casualties, dropping 7.8% to $86.58 a share after reporting sales that trailed expectations.

The company’s second quarter results, which were released afterhours last night, revealed that net income fell 10% to $142 million, or 32 cents a share, and sales tumbled 14% to $4.65 billion. Although profits were in line with Bloomberg’s median analyst forecast, sales were below the $4.7 billion average estimate. The concern here is that Amazon’s bottom line growth may start to suffer on the back of weaker revenues.

In the meantime, credit card company American Express fell 1.6% to $28.99 after unveiling a 48% plunge in its second-quarter net income from continuing operations, which came in at $342 million, equivalent to 9 cents a share. Revenues were also hit, down 18% to $6.1 billion. Also disconcerting was the surge in net charge offs (a gauge of bad loan write offs caused by consumers defaulting on credit card payments) which climbed to a record 10%, from 8.5% in the previous quarter.

The release of disappointing figures from some US bellwethers may have enticed investors to think twice about buying into a rally, perhaps on the fear that a sharp correction is about to ensue. By 3.30pm (London time), the Dow Jones Industrial Average was 19.2 points lower (-0.21%) to 9050.09, while the S&P 500 was 5.4 points (-0.55%) below its previous close at 970.89. The Nasdaq was, not surprisingly, the biggest loser, down 14.59 points (-0.91%) to 1586.93.

[1] Source: Times Online (24 July 2009)

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By Anthony Grech, Research Analyst, IG Index.

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