Week Ahead: Tech Earnings Key Market Catalyst As Mega Cap FAAMGs Report

 | Oct 24, 2021 08:51AM ET

  • Companies representing almost half of the S&P 500 report earnings this coming week
  • Investors await critical outlook forecasts
  • Oil hovers near 2014 levels

    • Notwithstanding beats by nearly 84% of companies that have already reported during this earnings season, investors remain anxious ahead of the torrent of releases scheduled for the coming week, which will feature some of the biggest technology companies in the US.

    These mega caps, including Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL)—all stalwarts of the marquee tech group dubbed FAAMGs—have been the driving force behind much of the equity bull market in recent years.

    h2 Can Big Tech Expansion Continue?/h2

    Will big tech continue delivering growth, even when faced with pressure from supply chain obstacles, increased government regulations and escalating Treasury yields? The latter, in particular, is a headwind for growth stocks.

    Yields tend to rise when investors are confident about the prospects for economic expansion, which naturally favors value stocks sensitive to the economic cycle. That, at least, is conventional wisdom.

    But conventional wisdom isn't always correct. Fisher Investments, an independent money management firm based in Camas, Washington, notes that tech shares can do well—or poorly—in a variety of interest rate environments. Indeed, based on their calculations, over the past 20 years, there has been a -0.10 correlation between rates and the sector's performance. Fisher's numbers indicate the technology sector moved in tandem with Treasury yields only 10% of the time.

    Nevertheless, even if that's accurate, the market narrative consistently insists the correlation between tech stocks and yields is much stronger. Therefore, investors bombarded by the general consensus view are likely to believe it, selling tech shares as yields rise whether that's historically accurate or not, creating a self-fulfilling prophecy.

    With that said, traders will have to rapidly take a stand this coming week, as the biggest tech names, AAPL, MSFT, GOOGL, AMZN and FB, release their quarterly numbers. These five companies alone make up more than 22% of the S&P 500 by weighting, which means this quintet of stocks has an outsized influence on the broader benchmark.

    Goldman Sachs reported that these firms also account for 46% of the SPX's market value. We imagine investors are now weighing whether the S&P 500 has the ability to resume its record-breaking rally into November.

    So far in October, the gauge has gained 5.5%. However, it shed 4.8% of value during September, its sharpest monthly drop since the March 2020 bottom, when the worst global health crisis in 100 years pummeled markets worldwide.

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    One thing we expect investors to focus on will be guidance from these tech behemoths. Companies like Netflix (NASDAQ:NFLX), which beat on earnings but balked on forecasts, providing warnings instead citing inflation as the reason, were mercilessly sold off. Additionally, the global chip shortage remains an ongoing, significant worry for both the companies and their investors. Expect to hear more about that during guidance from each of these companies in the coming week.

    h2 Inflation Worries Linger/h2

    On Friday, US stocks sold off after Fed Chair Jerome Powell indicated further concern about inflation, and said the US central bank should begin cutting back on asset purchases, though he didn't advocate raising rates just yet. Powell said the Federal Reserve was following price pressures closely and would administer policy accordingly.

    The tech-heavy NASDAQ 100 fell 0.9%, underperforming among major US indices. Conversely, the mega cap Dow Jones, which lists blue-chip value stocks, was the only benchmark in the green, +0.2%, as the trading week came to a close.

    That's a clear example of value outperforming growth due to rising inflation. It mimics the idea that increasing Treasury yields would provide the same paradigm.

    Treasury yields, including for the 10-year note, slumped on Friday, for the first time in eight days.

    The dollar slipped for the second week but seemed to find support as the week came to a close.