FAANG Is Crumbling, Signaling Dark Days Ahead

The quarterly results are in from two of the market’s top stocks – Microsoft (NASDAQ: MSFT) and Tesla (NASDAQ: TSLA) – revealing big-time earnings “beats.”

And sadly, investors aren’t impressed.

Microsoft reported an earnings-per-share (EPS) of $1.46, beating the $1.34 estimate. Tesla blew away its 3 cent EPS expectation as it posted a stunning $2.18 (ex-items) EPS for Q2.

Both earnings reports, made shortly after the market closed, resulted in some wild after-hours trading. Microsoft fell as low at 3% at one point while Tesla surged for a 6% gain.

Traders were particularly impressed with both Tesla’s profits and its progress toward monetizing new types of technologies, ranging from artificial intelligence to renewable energy.

As of noon today, though, Tesla shares are sinking. The stock retraced all its earnings-based gains and sits barely in the red (-0.10%). Microsoft opened lower this morning and surged, only to fall a few hours later. MSFT is now down over 2%.

The companies are tumbling amid a broader FAANG slump. Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), and Netflix (NASDAQ: NFLX) are all down over 1% on the day.

Analysts have been saying for weeks that the market is beginning to resemble its pre-dot com bubble appearance, when share values were inflating rapidly. Wells Fargo Securities senior analyst Christopher Harvey observed that again this morning as Big Tech struggled.

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“We are seeing growing similarities to the late 1990′s,” he warned, pointing to the “uber-cap” stocks (FAANG and Microsoft) that have enjoyed sharp returns since bottoming in response to Covid-19.

“Overall, our intermediate-term worry is that a melt-up may destabilize the marketplace and easy come, easy go – i.e., as stocks aggressively discount easy 1H21 comps but do not factor in political risks,” Harvey added.

Applying additional pressure to bulls today was the new U.S. weekly unemployment report, which revealed that 1.416 million new jobless claims were filed last week. It’s the 18th straight week with more than 1 million new unemployment filings – a trend that doesn’t bode well for the “V-shaped” recovery.

“The surge of COVID cases in the Sun Belt and the stalling out of reopening activities in other states has seemingly caused another round of layoffs that has stymied the nascent labor market recovery,” explained Jefferies money market economist Thomas Simons in a note.

The cherry on top of today’s bearish sundae is the $600/week unemployment benefit, set to expire this weekend. Congress won’t have a deal done for more relief until early August, meaning that those currently receiving unemployment insurance will miss out on 1-2 weeks of payments.

And right now, the last thing bulls need is a strapped-for-cash consumer. Especially with market stalwarts (FAANG and Microsoft) encountering turbulence near their all-time highs.

Thankfully, though, a relief package will eventually arrive. The problem is that, according to Republican leaders, it should only total to $100/week as lawmakers sort out a more permanent solution.

As a result, Congress’ new unemployment plan will undoubtedly create some short-term economic stress, which could manifest as volatility (at best) or even a market-wide correction (at worst).

Either way, it’s certainly hard to be a bull these days. Traders have been waiting for months to collect their “rally-fueled paychecks.” Now that the unemployment benefit is running out and jobless claims are still north of 1 million per week, they may have a good reason to do so.

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