As Earnings Season Continues, Market Bounces From Tech-Led Selloff

Ahead of Apple earnings later today, the conclusion of a Fed meeting tomorrow and amid a raft of economic data, the market seems to be getting a bit of its mojo back after a tech-led selloff yesterday.

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Key Takeaways

  • Market looking toward Apple earnings after the closing bell
  • Tech stocks have faltered amid mixed earnings reports
  • Fed starts a 2-day meeting today; rate hike tomorrow seen as not likely [Fed starts a 2-day meeting today; rate hike tomorrow seen as not likely]

(Tuesday Market Open) Ahead of Apple (AAPL) earnings later today, the market seems to be getting a bit of its mojo back after a tech-led selloff yesterday.

In recent days, worries about trade have taken a back seat to earnings, and tech results have been mixed. Investors appear to be waiting to see whether results from Apple could help ease some of the concerns about the tech sector.

Today also marks the start of a two-day Federal Reserve meeting. There’s no press conference scheduled after the conclusion of the meeting tomorrow, and, based on the futures market, chances of a rate hike appear slim, with the CME FedWatch tool showing a mere 3% chance of a rate hike.

This morning, Dow Jones Industrial Average ($DJI) component Procter & Gamble (PG) reported stronger than expected earnings per share, but disappointed on revenue. Its shares, which were already down 13% year-to-date, were down around 1% in early trading. One reason for the fall in share prices may be the consumer products company’s reported 2% drop in prices paid at the retail level. A fall in prices can mean a squeeze in what some analysts say are already tight margins at many of PG’s core product lines.

Tech Stocks Falter

Tech stocks short-circuited Monday, as pressure continued to weigh on the sector as closely watched stocks Facebook (FB), Netflix (NFLX) and Twitter (TWTR) have disappointed many investors during this earnings season. Their performance appears to be overshadowing solid results from Amazon (AMZN) and Google parent Alphabet (GOOG, GOOGL). While Amazon isn’t in the S&P 500 information technology sector, the company is nonetheless a heavyweight in the tech space.

On Monday, the tech-heavy Nasdaq (COMP) posted the biggest loss of the three main U.S. indices, falling nearly 1.4%. The S&P 500 (SPX) fell 0.58%, with the information technology sector leading the decline. 

All of the so-called FAANG stocks were in the red Monday. FB and AMZN dropped more than 2%. NFLX slid 5.7%. GOOGL dropped more than 1.8%. AAPL was the least hardest hit, posting a 0.56% loss, ahead of the company’s earnings report today. 

Apple Earnings Ahead

Apple is scheduled to report earnings after the close. The results are likely to be closely watched by many investors, and given the current malaise in the sector, some may be wondering whether the iPhone maker could help revive tech stocks. 

However, some analysts are expecting a relatively quiet quarter for AAPL, as the tech giant hasn’t rolled out major product releases recently. AAPL is expected to report adjusted EPS of $2.19 on revenue of $52.34 billion, according to third-party consensus analyst estimates. Management’s guidance calls for revenue between $51.5 billion to $53.5 billion. In the same quarter last year, AAPL earned $1.67 per share on revenue of $45.41 billion. 

Energy and M&A Provided Bright Spots

Despite the tech-led selloff Monday, there were some bright spots to the market.

Among S&P 500 sectors, energy was the second biggest gainer after telecommunications services. Oil prices gained, with WTI crude oil (/CL) rising back above $70 a barrel, at least temporarily. Futures for September delivery settled above the $70 mark before pulling back slightly in early trading this morning. Rising oil prices can be a boon for producers, even as they can eat in to margins for companies that have to buy fuel for their operations, such as transportation and manufacturing companies.

On the M&A front, the Wall Street Journal reported that General Electric (GE) has hired an investment bank to try to sell key parts of its digital business. Recall a strong push into digital was a major initiative for former CEO Jeff Immelt. A move away from digital may be a sign that Immelt’s replacement, John Flannery, who’s been tasked with turning around the conglomerate, may be shifting GE to its core industrial roots. GE’s shares rose 0.77% Monday.

FIGURE 1: TECH FALLS; ENERGY BOUNCES. Mixed results on the earnings front may have contributed to a fall in the tech sector (candlestick) yesterday. Meanwhile, a rise above $70 in crude oil prices seems to have given the energy sector (purple line) a lift. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Volatility Makes a Comeback: After a period of muted volatility, the Cboe Volatility Index (VIX) is back on the rise. The VIX jumped more than 9% to above 14 Monday, after also rising on Friday. It has eased back this morning but remains above recent levels. Recently the VIX had been trading down around 12, near the bottom of its recent range and not too far above the lows it traded at for much of last year. Although volatility can feel uncomfortable for long-term investors, it can also serve as a reminder that over a long enough time horizon, market ups and downs tend to smooth out. For active traders and some of the big banks that rely heavily on trading fees, volatility can be welcome news.

August Returns:On this last day of July, it might be worth considering a quick history lesson about how the market has performed in Augusts past. Ever since World War II, after usually gaining around 1% in July of midterm election years, the S&P 500 has tended to stumble by a similar amount in both August and September, according to investment research firm CFRA. The returns in August and September rank them among the worst months of a typical midterm election year since 1946, the firm said. “Today, history says (but does not guarantee) that investors should prepare for, but not necessarily run from, an increase in volatility,” the firm said. 

Other Economic Reports: This week, with closely watched reports on personal consumption expenditures, payrolls and a Federal Reserve meeting, you could be forgiven for not paying attention to some other economic data points. But you may want to consider watching construction spending, factory orders and the Institute for Supply Management’s manufacturing index. While they may be lesser reports than the monthly look at non-farm payrolls, these data points are like streams flowing into the bigger river of gross domestic product. Sometimes, strength or weakness in these numbers, which reside “up the chain" from the end user, can be precursors to strength or weakness in the broader economy.

Good Trading, 

JJ

@TDAJJKinahan 

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