Finance

Big Tech Profits Don’t Determine the Stock Market: Morning Brief

Published

1 month ago

July 24, 2024

Big Tech Profits Don't Determine the Stock Market: Morning Brief

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Tesla (TSLA) and Alphabet (GOOGL) started Big Tech’s gains on Tuesday with mixed results. They all fell into after-hours trading.

But despite all the fuss about the concentration of outsized profits in the hands of a few stellar stocks, stock bulls have two reasons to cheer as earnings season intensifies.

First, the markets just completed a violent rotation that shifted the gains of the seven largest US stocks – Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Meta (META), Nvidia (NVDA), Tesla and Alphabet – to small shares. -cap stocks and interest rate sensitive names.

Sectors such as real estate, home builders and regional banks are now among the leading sectors.

The severity of the move – which accelerated with the latest weak inflation data – should not be underestimated.

Liz Ann Sonders, chief investment strategist at Charles Schwab, wrote that June was the Russell 2000’s worst month versus the Nasdaq in over a year. However, she notes that July is already following developments best since 2016.

Meanwhile, in the land of giants, the Magnificent Seven lost $1.25 trillion in market cap value over seven sessions recently – just as small-cap stocks were starting to gain strength.

The Mag Seven’s trillion-plus valuation drop represented an 8% price drop – yet the overall market (the S&P 500) fell only 2% over the same period. Time is everything.

The other tailwind favoring the bulls is a game of profit catch-up.

The S&P 493 (the S&P 500 minus the Mag Seven) is finally climbing out earnings recessionas noted by the BofA US Equity & Quant Strategy team.

Earnings per share (EPS) for the S&P 493 has been “flat to down” over the past five quarters, BofA wrote, even though earnings per share for all 500 names turned positive three quarters ago.

This renewed strength for the rest of the market comes just as earnings growth is expected to “slow for the second consecutive quarter for the Magnificent Seven and again for the second quarter in a row.” [third quarter].”

It looks like even the earnings growth is happening on a higher time frame.

The very fact that overall market volatility remains subdued despite these tectonic shifts happening under the hood of the market is a testament to the resilience of the bull market itself.

And BofA expects the rally to continue through broader expansion.

“Given the high correlation between Tech’s stock outperformance and earnings,” the bank wrote, “we expect the narrowing growth gap to be the catalyst for a broadening of the market.”