Greece who? Technology was last week’s stock driver. Do tech-sector earnings—and the broader market—have the legs for more upside? A fresh all-time high in the tech-heavy NASDAQ Composite, up some 4% last week, set the stock market’s tone on the back of upbeat earnings news. And now, the seemingly seismic shift in investor sentiment sets up an interesting backdrop heading into the busiest five-day stretch for Q2 earnings reports.
Last week, upbeat earnings news from Netflix (NFLX) and Google (GOOG, GOOGL) accounted for a big chunk of NASDAQ’s advance. In fact, the Google share rally added $65 billion to its market cap, topping that of Ford (F) and General Motors (GM) just to give a little perspective. Apple (AAPL) and Intel (INTC) helped lift the broader tech space, too.
The S&P 500 (SPX) also rallied significantly, landing this broad-market measure in the top end of its 2070-2135 trading range. The past week reminds us just how quickly markets can change. Many measures of volatility—which were setting multi-month highs through early July—plummeted to 2015 lows over the course of a few days.
Market “fear gauge,” the CBOE Volatility Index (VIX) finished below 12 on Friday. According to Bloomberg, a five-day, 39.4% drop in the volatility index through Thursday marked the largest decline since its inception in 1990. The index, which hit a 2015 low of 11.77 intraday Friday, is now a far cry from the multi-month high of 20.09 on July 9 (figure 1).
The sharp fall in volatility isn’t limited to SPX stocks. The CBOE NASDAQ-100 Volatility Index (VXN) and the CBOE DJIA Volatility Index (VXD) are down nearly 30% in the past week as well.
In fact, the table below shows volatility is sharply lower across most asset classes in the past week, including small-cap stocks, emerging markets equities, and a measure of China’s equities volatility—certainly one of the high-volatility stories to start July. So it seems that the macro fears that rattled investor nerves earlier this month, including uncertainty stemming from a Greek debt extension and China-sparked turbulence across some of Asia’s equities markets, have receded for now. China’s leading stock index has now recovered 13% since July 8, as policy makers there continue to introduce measures to bolster equities. In the latest development, regulators tightened control of online financing, saying all client funds must sit in established banks while internet finance firms will need approval from financial and cyberspace regulators.
|One Month||Year to Date|
|S&P 500 Volatility||VIX||-29%||-37%|
|Russell Small-Cap Volatility||RVX||-25%||-37%|
|Emerging Markets Volatility||VXEEM||-27%||-21%|
Earnings Roll In
Looking forward, the domestic economic calendar is light this week, with housing numbers the only figures of significance on the docket in the days ahead. Focus next week turns to the Federal Reserve’s July 29 monetary policy meeting. The Fed’s not expected to produce a change to interest rates then but could lay additional groundwork for a rate hike later this year.
Until that meeting, Q2 earnings reports are likely to remain the main drivers for daily market action. And traders have plenty to pick from. More than 400 companies release results this week, including tech stronghold IBM (IBM), which will be closely watched for product evolution. Apple (AAPL) also leads the way this week, drawing investor attention on Apple Watch growth.
Financial heavy-hitter Morgan Stanley (MS) is due up to the plate. Its revenue figure may be of particular interest as top-line results have tripped up some financials. Microsoft (MSFT), Yahoo (YHOO), and Texas Instruments (TXN) round out the tech slate, while Verizon (VZ), Coca-Cola (KO), and American Express (AXP) also report.
So Far, So Good?
To date, Q2 results have not been the disappointment that Wall Street braced for. According to Zacks Investment Research, of the first 10% of S&P 500 companies that have released Q2 results, total earnings are up 6.3% from last year on 2.2% higher revenues. Some 75% of firms that reported beat consensus earnings per share (EPS) estimates and nearly 35% posted better-than-expected revenues.
Yet, the majority of companies are still due to announce their results and overall numbers are expected to be down 4.7% from last year on 5.1% lower revenues. The cautionary crowd might argue that early results, which were heavily weighted toward financials, might not necessarily be indicative of the trend across all of Corporate America.
Still, judging by VIX’s sub-12 readings, investors don’t seem too fearful about the earnings reporting period. That mindset could leave the market exposed if upcoming numbers don’t live up to expectations.