This week is when earnings season comes to a full boil. We expect to hear from about a third of the S&P 500 (SPX) constituents, including a majority of the “Magnificent Seven” stocks that have driven the bulk of the benchmark index’ performance this year. Alphabet (GOOG, GOOGL) and Microsoft (MSFT) report after the US close tomorrow, with Meta Platforms (META) and Amazon (AMZN) following on successive days. When we consider these stocks’ individual and collective weights in key indices, it is quite fair to say that these four stocks alone can set much of the tone for the days to follow.
(As for the other three: Tesla (TSLA) fell 10% after reporting last week; Apple (AAPL) is due next week, on the 2nd; Nvidia (NVDA) is on a different cycle and tentatively due on the 21st of November.)
In case we need a refresher about the relative importance of these stocks, the four that are scheduled to report earnings this week themselves represent about 16% of SPX and 25% of the NASDAQ 100 (NDX). On Tuesday alone, MSFT and the pair of GOOG+GOOGL represent about 11% and 16.4% of those two indices, respectively. But we have no way of knowing how the market’s post-earnings reactions will affect markets overall. (We’ll check in tomorrow to see how the markets are setting up expectations ahead of those results)
Much has to do with the earnings themselves, and also whether the two companies move in the same or opposite directions. If they move together – up or down – it will be difficult for the major indices to overcome that gravitational pull. But if they move in opposite directions, they will likely cancel each other out. A few weeks ago, we discussed how correlation, or lack thereof, influence volatility indices. While we need to concern ourselves with the potential feedback effects of a synchronous reaction to earnings, even significant moves, but in opposite directions, could have a dampening effect on broader markets.
While it is impossible at present to know what the actual corporate earnings will be, let alone the market’s reaction to them, it does appear that the risks are asymmetric. On Friday, I was asked what sort of catalyst could get stocks moving in one direction or another. For better or worse, it was much easier to construct a scenario where stocks could move down collectively than vice versa.
To get stocks moving higher simultaneously, we would likely need either the market to decide either (1) that the economy was indeed strong enough and broad enough to get money out of relatively high yielding, low-risk cash-equivalents and into the other 493 stocks in SPX; or (2) the Federal Reserve and other central banks switch to an accommodative stance. The former is possible, but hardly the consensus view; while the latter would likely be preceded by a recession or an exogenous event sufficient to cause a change in monetary bias. In that case, the synchronous rally would likely occur only after period of weakness.
Instead, bear in mind that when I was asked the question, we were looking at NVDA down about -9% on the week, and TSLA down almost -19%. If investors throw in the towel on either of those names – so far, they haven’t — it would represent even narrower leadership and therefore an ever more fragile set of market leadership. My concern is that if we somehow remove constituents from the “Magnificent Seven,” turning it into a “Super Six,” “Fab Five,” or “Fantastic Four,” it would place an even greater importance upon a shrinking list of outperformers, revealing deterioration in the climate for equities and increasing fragility.
As of now, that concern is premature. Both NVDA and TSLA have recovered a little ground today as stocks have rallied. And the stock rally was predicated by a phenomenal reversal in 10-year yields. After rising through 5% this morning, they reversed course just below 5.02%, and are now over 6 basis points lower right now at 4.85%. A 17 bp intraday range is huge, and while the move has put a floor under equity prices, the volatility may be impeding traders from rushing back into stocks so far.
And keep in mind that it’s Monday. As we pointed out last week, SPX is on a 15 straight Mondays winning streak, and that index has been up 80% of the time on that day this year. Maybe that’s all the bias we need.
Disclosure: Interactive Brokers
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