I'm still bullish on Alphabet after third-quarter earnings; My macro outlook

1) The first of the tech giants to report earnings this week released third-quarter numbers yesterday after the close...

Google and YouTube owner Alphabet (GOOGL) posted strong earnings – sending its shares up as much as 7% this morning. (The Wall Street Journal gave a summary here: Google's Cloud Business Powers Accelerating Revenue Growth.)

Year over year, revenue rose 15.1% to $88.3 billion (above expectations of $86.4 billion), led by 35% growth of cloud revenue to $11.4 billion (above expectations of $10.8 billion) and 10.4% growth in ad revenue (slightly surpassing expectations).

Meanwhile, expenses only rose 7.9% year over year. As a result, operating margin – already a mouth-watering 27.8% last year – expanded to 32.3% and earnings per share soared 36.8% year over year from $1.55 to $2.12, handily beating expectations of $1.83.

During the quarter, Alphabet repurchased $15.3 billion of its stock and reduced its share count by 2.2% year over year. It also paid out $2.5 billion in dividends, giving the stock a dividend yield of 0.5%.

Put simply, it's hard to find any flaws with this earnings report.

It's simply astounding that a company of this size – it now has trailing 12-month revenue of $340 billion – can still be growing this quickly and this profitably.

Alphabet is now up nearly 190% versus about 101% for the S&P 500 Index since I picked it – along with Berkshire Hathaway (BRK-B), Meta Platforms (META), and Amazon (AMZN) – as a core holding in the April 17, 2019 inaugural issue of my former newsletter Empire Investment Report at my old firm Empire Financial Research.

My view today – as it has been for more than five years – is that Alphabet is still a great stock for conservative, long-term-oriented investors.

2) A week ago at our company's annual conference in Las Vegas, I gave a presentation that included 13 slides on my constructive macro outlook. You can see all of them here, and I'll share the highlights below...

As I've been saying for well over a year, inflation is under control and has ceased to be an economic issue (though it's certainly a political one!). Here's the slide I shared:

We've all heard a lot of talk about how Americans can't afford groceries... But as a percent of the average worker's wages, after a brief spike in 2022, they're close to the most affordable they've ever been today. Take a look at this slide:

To fight inflation, the Federal Reserve raised interest rates at an unprecedentedly rapid rate. Nearly all investors and economists confidently predicted (based on all historical evidence) that this would lead to a recession, with GDP shrinking and unemployment soaring. But neither of these things happened...

As I showed in this next slide, GDP growth has remained strong:

Meanwhile, the Federal Reserve Bank of Atlanta expects that third-quarter GDP growth will be a robust 2.8%. This chart shows the rise in estimates (note that this chart has been updated from the one I presented a week ago):

And the unemployment rate, after briefly spiking during the pandemic, has come way down and today is at a mere 4.1% – a historically low level. In this next slide I shared (with a chart from a recent Week in Charts blog post from Creative Planning's Charlie Bilello), you can see the change:

The Fed just started lowering rates with a 0.50% cut last month, and the market expects two 0.25% cuts this year and four more next year. I think the economy will remain strong, so I expect there will only be two cuts next year, as shown in the red line I added to this chart (again from Bilello's recent Week in Charts post):

Regarding the debate over the "hard landing" versus "soft landing" versus "no landing" for the U.S. economy, I agree with this recent post on X from Ben Carlson – the author of the popular financial blog A Wealth of Common Sense:

I concluded my presentation by saying that I remain constructive on stocks and the economy – here's how I summed it up:

• Though slowing, the economy remains strong.
• The expansion is now 51 months long. The last four expansions in the U.S. lasted a minimum of 73 months with the 2009-2020 expansion running for a record 128 months (over 10 years).
• Inflation is muted and likely to remain so.
• There are two win-wins for investors:

1) Either the economy will remain strong (good for stocks) or it will weaken and the Fed will cut more aggressively (good for stocks); and

2) Investors can sit in stocks (and likely earn decent returns) or cash (and earn risk-free returns of more than 4%). (Just make sure you're earning market rates on your cash!) [I discussed this most recently in my September 26 e-mail.]

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.