Stocks fell this afternoon as earnings season enthusiasm waned after the market opened flat. Dow industrials sunk the most opposite tech stocks, which finished level following strong earnings “beats” from two Big Tech names.
Microsoft (NASDAQ: MSFT) shares jumped 4% higher in response to a better-than-expected quarterly report. The company exceeded its EPS ($2.27 reported vs. $2.07 expected) and revenue ($45.32 billion reported vs. $43.97 billion expected) estimates with ease. Revenue was up 22% year-over-year, hitting a growth rate Microsoft hasn’t seen since 2018.
Google-parent Alphabet (NASDAQ: GOOG) impressed, too, following in Microsoft’s footsteps by beating both its EPS ($27.99 reported vs. $23.48 expected) and revenue ($65.12 billion reported vs. $63.34 billion expected) estimates. GOOG shares similarly traded 4% higher.
Elsewhere in the market, non-tech stocks struggled. General Motors (NYSE: GM) posted an earnings “beat” of its own, but GM shares fell, even after the automaker raised its full-year guidance. Boeing (NYSE: BA) endured a worse-than-expected Q3 loss and also saw its shares tumble.
Oanda senior market analyst Ed Moya said that the economy has been able to overcome inflation concerns and slimming margins, as evidenced by the S&P’s strong crop of earnings.
“This earnings season has been about pricing momentum and whether consumers are able to handle surging costs,” Moya said.
“So far it seems the consumer can handle it.”
But it’s become abundantly clear that, while last quarter went almost universally better than anticipated, cracks are starting to form within the US economy. Supply chain problems limited many companies toward the end of Q3 and those issues could impact Q4 earnings significantly.
Yes, there were plenty of earnings “beats.” Keep in mind, however, that analysts lowered their expectations ahead of earnings season. The roughly 80% of S&P companies that surpassed expectations certainly were helped by this “estimate shift.”
Most analysts remain unconcerned, though, as bulls look forward to the holidays.
“We see signs that there could be more gains to come in the final two months of the year,” explained Ryan Detrick, chief market strategist for LPL Financial.
“Seasonal tailwinds, improving market internals, and clear signs of a peak in the Delta variant all provide potential fuel for equities heading into year-end, and we maintain our overweight equities recommendation as a result.”
Detrick didn’t mention that a vaccine mandate deadline and stretched-thin supply chain could cause chaos during the busy holiday shopping season. Walkouts in key industries have already begun. What happens when truckers stop showing up for work?
Timmy might not get the toys he wants for Christmas. And his family won’t have the Thanksgiving turkey they were hoping for.
These might seem like “first world problems,” relatively speaking, but they’ll be indicative of a larger issue:
The fact the US is on a collision course with significant headwinds to end the year as a Fed taper approaches.
So, as has been the case for months, bulls should proceed as usual but with utmost caution. More volatility is likely on the way.
And in the event of another correction, the selling may happen even faster than the most recent dip, when the S&P plunged over 5% from peak to trough in September.
