Stock Market Warning Signs Mount As State Street And Roblox Suffer Steep Losses After Earnings

Topline

Earnings season kicked off with strong figures from major banks last week, but new reports from financial services monolith State Street and tech startup Roblox have led to steep stock declines on Tuesday—a cautionary sign that the bear market may not be over, especially so long as uncertainty lingers over the Federal Reserve’s aggressive interest rate hikes.

“More negative surprises lie ahead for investors,” warns Morgan Stanley’s chief strategist.

getty

Key Facts

State Street stock sank as much as 15% to $67.85 on Monday after the financial giant reported weaker-than-expected profits of $549 million (or $1.52 per share)—down 9% from one year prior due to higher credit expenses, lower fee revenues and elevated operating costs.

In a statement, State Street CEO Ron O’Hanley said economic conditions drove fee revenue market levels “significantly lower,” effectively forcing the bank to charge lower prices for its investment management services.

Disappointing earnings had another casualty on Monday: Shares of gaming platform Roblox collapsed 12% after the firm said the impact of foreign currency fluctuations led to a roughly 2% in the yearly growth rate of revenue and bookings last month.

“More negative surprises lie ahead for investors,” Morgan Stanley analyst Michael Wilson cautioned in a Monday note to clients, saying the fastest Fed policy shift in 40 years drove the sudden failures of Silicon Valley Bank and Signature Bank last month and could bring forth more surprises as officials keep interest rates at elevated levels.

Earnings estimates for the first quarter have already been lowered by 15% since a peak last year, and the analysts say that worries over tighter credit conditions have pummeled business sentiment this month—a telltale indicator of further earnings weakness to come.

In another concerning development, Wilson points out market breadth—as measured by the percentage of stocks in the S&P 500 that have outperformed the broader index in the past three months—is at the lowest level on record, a sign investors may “suddenly” acknowledge that earnings forecasts “remain too optimistic,” he says.

Crucial Quote

“If there is one thing that can throw cold water on the large mega cap rally it’s higher yields due to a Fed that can’t stop hiking,” Wilson said Monday. “We think the recent collapse in breadth is the market’s way of warning us we are far from out of the woods with this bear market.”

What To Watch For

Earnings season is still just getting started. A hefty slate of banks—including U.S. Bancorp and Capital One—will release earnings this week, and tech giants Microsoft, Alphabet, Amazon and Meta are all due out next week.

Contra

Despite early signs of weakness, the start of earnings season has been far better than expected overall. Of the 30 companies reporting last week, 90% beat analyst projections—the highest upside surprise since at least 2021, according to Bank of America’s Savita Subramanian. She is optimistic results will ultimately prove to be in line with expectations, but she also acknowledges credit conditions could deteriorate, forcing more companies to lower their earnings projections.

Tangent

Just last week, the Fed warned it now expects the nation’s economy will fall into a “mild recession” by the end of the year. Despite banking turmoil leading to a crop of bank failures last month, the Fed continues to see “slower-than-expected progress on disinflation,” according to minutes released Wednesday. As a result, economists are unsure whether the central bank will finally put an end to its hiking campaign next month—or drive rates even higher instead.