Traders On Edge Ahead Of Amazon, Google Earnings In “Perverse” Market
Last week, shortly after the start of Q4 earnings season, we presented an analysis from Bank of America according to which stocks were doing something they haven’t done since the froth of the dot com bubble: despite a preponderance of companies beating earnings expectations, their stock price was punished with a record 1.6% underperformance relative to the broader market on the next trading day, to wit:
companies which beat on both sales and EPS underperformed the S&P 500 by 1.6% the following day, representing the worst reactions in BofA data history going back to the dot com bubble days of 2000!
Then, one week later after another deluge of Q4 reports, BofA reran the analysis and found more of the same “perverse” reaction to earnings beats:
Perverse reactions remain a big theme this earnings season. Companies that beat on both sales and EPS underperformed the S&P 500 by 50bps the following day, the worst reaction in history, albeit improving from the -1.6ppt through the prior week. The perverse reactions point to euphoric sentiment and rich valuations, similar to the last time this happened: right at the peak of the Tech Bubble.
Said otherwise, the market is so priced to perfection that even “beats” of consensus expectations aren’t big enough to satisfy the market, unless said beats blow out even the whisper estimates… which are way above consensus.
Why does this matter?
Because with two giga-caps reporting after the close, Amazon and Alphabet (Google), representing a massive $3 trillion in market cap between them, or almost the entire Russell 2000 which is $3.18TN…
… Bloomberg’s Heather Burke writes that “any whiff of disappointment in today’s big tech earnings could be enough to derail the Nasdaq 100’s outperformance.”
As Burke notes, in the past few weeks, the Nasdaq 100 has reasserted itself over the S&P 500 as the reflation trade has fizzled and as investors sought the relative safety of tech amid fading in vaccine and stimulus optimism.
And while the gauge still trades handily above its 50-DMA, breadth — as with the S&P 500, has gotten weaker, with the percentage of NDX members trading above their 50-DMA largely declining last month.
Next, the Bloomberg analyst picks up on the “perverse” market reactions, writing that “earnings expectations are high – for the first time in Bloomberg records, reports have led to price declines.” As such, she cautions that the FAAMG earnings may trigger profit-taking – just recall Apple and Tesla last week.
Meanwhile, Amazon.com and Alphabet have their own challenges. The e-commerce giant’s revenue growth may decelerate after pandemic gains while investors will focus on the profitability of Google parent Alphabet’s cloud business for the first time.
As Burke concludes, “with the market still jittery, the bar for a selloff in mega tech probably isn’t that high”, although one look at today’s surge in the Nasdaq may leave you with a different view.
Tue, 02/02/2021 – 15:15