Wall Street stocks rise as Microsoft gains on earnings beat

US stocks rose on Wednesday, helped by strong gains for Microsoft, as a bullish forecast from the tech group lifted sentiment following sharp drops on Wall Street in the previous session.

The S&P 500 added 0.9 per cent in choppy trading and the technology-heavy Nasdaq Composite was up 0.7 per cent by lunchtime in New York, after declines of 2.8 per cent and almost 4 per cent respectively on Tuesday.

Google parent Alphabet reported a $1.5bn drop in quarterly profits following the closing bell on Tuesday, citing a slowdown in European advertising spending at its YouTube division, driven by Russia’s invasion of Ukraine.

But at the same time, Microsoft topped analysts’ expectations for revenue and earnings in the latest quarter, with chief executive Satya Nadella predicting that tech spending would remain strong even if economic growth slowed.

Microsoft, which has a market value of $2tn, added nearly 6 per cent on Wednesday, while Alphabet fell 3.5 per cent.

Ahead of this earnings season, with Apple and Amazon yet to report results, some investors had hoped the dominance of big tech groups would secure their finances and relatively high valuations against the economic pressures of the war and the impact of surging inflation on household finances.

“This sector was priced for perfection and set up to fail,” said Julian Howard, lead investment director for multi-asset solutions at fund manager GAM. “Anything that is short of a really good [earnings] beat is going to be severely punished by the market.”

But Microsoft’s performance had offered reassurance, said Antoine Lesne, head of research and strategy at State Street’s SPDR ETF business. “The earnings are not all that bad,” he said. “The next big question is have we passed peak inflation? We believe some stickiness will remain and central banks will have to tighten, hurting [high growth tech] more.”

Europe’s regional Stoxx 600 share index closed up 0.7 per cent. Exporters were helped by the euro hitting a fresh five-year low against the dollar of below $1.06, on bets of aggressive interest rate rises in the US, with the dollar index reaching its highest point since 2017.

But implying further swings ahead, an index of the expected volatility of large-cap European stocks rose to a reading of nearly 33, far above its long-run average of about 20.

In government debt markets, the yield on the US 10-year Treasury note rose 0.02 percentage points to 2.8 per cent, following a bout of haven buying earlier in the week. The yield on the policy-sensitive two-year note fell 0.03 percentage points to 2.55 per cent. Bond yields rise as their prices fall.

US Federal Reserve chair Jay Powell has signalled that the central bank is poised for a string of rate rises to battle surging consumer prices. But strict social restrictions in China, stemming from the nation’s zero-Covid policy, have muddled investors’ inflation forecasts.

“Markets are trying to sort out the economic consequences of lockdowns in China,” said Gergely Majoros, investment committee member at Carmignac, citing the risk of snarled up manufacturing supply chains exacerbating inflationary pressures from Russia’s invasion of Ukraine, which has boosted fuel and food prices.

But Chinese authorities, having permitted the nation’s tightly controlled currency to weaken, would also lower the cost of importing goods from the world’s workshop, which “could be deflationary”, said Majoros.

Brent crude, the international oil benchmark, fell 1.1 per cent to $104 a barrel. Gas futures linked to TTF, Europe’s wholesale natural gas price, were up just over 10 per cent at €108.5 per megawatt hour after Russia’s Gazprom froze supplies to Poland and Bulgaria.