Ladies and gentlemen, the FAANGs have left the building.
It’s the last day of the month, and the biggest earnings week of the quarter is wrapping up. Yesterday’s reports from the FAANGs mean all five are out of the way, and “blowout” is the word many analysts are using to describe Thursday’s results. Let’s face it: The message they sent was a very solid one for the market. Let’s see if the rest of Wall Street can build on their momentum.
We’ll discuss the FAANGs in a minute, but first some new business. Stocks had a slightly higher tone in the pre-opening hours, with NASDAQ Composite looking strongest thanks, of course, to the FAANGs. Apple (NASDAQ:AAPL) rose more than 7% ahead of the bell, easily climbing above that $400 level it was banging its head against recently. Amazon (NASDAQ:AMZN) climbed 6%, and so did Facebook (NASDAQ:FB). Alphabet (NASDAQ:GOOGL) was the laggard, down slightly. Overall, stocks faded a bit into the open.
All the other indicators seem stuck in their usual modes: with gold up again and on the verge of testing $2,000 an ounce and 10-year Treasury yields down again and below 0.54%–the lowest level since March and just about the lowest ever. Crude keeps bouncing off of $40 a barrel.
There are some fresh earnings this morning, including a better-than-expected quarter from Caterpillar (NYSE:CAT), whose shares rose 1% in pre-market trading. Merck (NYSE:MRK) is also up nicely in the pre-market hours after surpassing expectations and raising guidance.
It’s a different story in the oil patch, though, as both Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM) shares fell in the pre-market after reporting wider than expected losses. It was basically a foregone conclusion heading into earnings season that oil services were going to take it on the chin, but this morning’s punch still left quite a mark.
An inflation reading today showed Personal Consumption Expenditure (PCE) prices slightly up in June, but not more than expected. The headline number rose 0.4% and core rose 0.2%. The Fed has said inflation isn’t a major concern right now.
There’s one more data point before the weekend, as the University of Michigan sentiment report is due soon after the open. Consumer confidence earlier this week was below analysts’ expectations, and hopes aren’t too high for this sentiment data, either.
Remember that today is the deadline for Congress to act on some sort of stimulus plan before the old one runs out, and The Wall Street Journal headline today says the recent virus surge appears to have slowed consumer spending in recent weeks. Not good.
FAANGs Go Four for Four
After an earnings barrage like last night, where do we even start?
Well, maybe by saying things look awfully healthy in the FAANG universe despite the horrendous Q2 the U.S. economy just suffered. Apple, Alphabet, Facebook and Amazon all probably got an assist to some extent from the stay-at home economy, but that’s not the only reason they’re advancing. Credit also goes to strong management teams that just proved their mettle in a crisis.
The FAANG earnings are still the main focus as we start the new day, with three of the four that reported yesterday up ahead of the bell. Going in, there was fear that they’d suffer the “Microsoft” (NASDAQ:MSFT) syndrome–rising ahead of earnings on big expectations and then getting pushed down after the results–but they still delivered.
You already know the main numbers–all four companies beat analysts’ expectations–so there’s no reason to repeat them all here. A few takeaways that really stuck out, however, were Apple’s much-better-than-expected iPhone sales in the June quarter, the same company’s success growing its business in Greater China, Amazon’s eye-popping bottom line beat, and a strong cloud performance from Alphabet.
It’s also interesting to see Apple announce a four-four-one stock split, something that doesn’t happen too often these days. Maybe it’s the start of a trend. One published report did say that Apple, once split, will go from first in the Dow Jones Industrial Average to 16th in price, which may slow the pace of the Dow’s gains slightly. So that could be one side effect.
There are some holes you could poke. Apple didn’t share guidance for the current quarter, and Alphabet’s revenue fell for the first time in history. Also, Amazon’s closely watched Amazon Web Services (AWS) cloud platform didn’t live up to analysts’ quarterly growth expectations.
That’s being picky, though, in a quarter that turned into a blowout basically across the board for all four. Shares of three of them rose 1% to 5% in post-market trading immediately after the companies reported, with Alphabet the only one getting punished at all.
So What Risks do FAANGs Face?
So can these stocks–which together compose a pretty decent chunk of the S&P 500‘s valuation–continue to draw strength? It’s hard to bet against them based on their recent history and the way they’ve dominated the stay-at-home economy.
One argument against the bull thesis, maybe, is valuations. Even Apple, traditionally a stock that traded on the low end of the valuation chain, is priced at around 30 times forward earnings projections. Amazon, unlike Apple, has never been cheap and isn’t now, by any stretch of the imagination.
Also, the “pull forward” effect, especially on device sales for Apple, might be a factor in months to come. People snapped up Macs and iPads in the old quarter as businesses and schools sent workers and students home. How many more of these devices can they buy now? Some say the picture actually looks decent going forward in part because with kids at home, schools and parents will have to buy each child a device, rather than having kids share them at school.
Meanwhile, sizzling cloud competition might be starting to level growth prospects in that space for individual companies. Amazon could be learning that up close and personal, judging from the AWS miss. Also, the soft broader economy could be hurting cloud demand from some sectors, like travel.
The weak economy could also start weighing more on advertising demand, with possible ramifications for Facebook and Alphabet. However, as one analyst pointed out Thursday on CNBC, Alphabet’s search platform is pretty horizontal, meaning it embraces most sectors around the world. If one sector is hurting, all the others don’t necessarily see the impact and stop spending on ads. Alphabet executives sounded cautiously optimistic on their call.
In Other News…
Turning away from the FAANGs, the rest of the market had a weird day yesterday. The Nasdaq Composite definitely turned things around big time, rising about 200 points from its morning lows to its afternoon highs. The Dow never got back on its feet after getting knocked down early on, though it did finish off its lows.
Those economic numbers Thursday morning looked lousy, no question, and had a lot to do with the market’s early struggles. Most of us probably hope we’ll never see a gross domestic product figure like that again, as the economy tanked at worse than a 30% annual rate in Q2.
The question now is what’s next on the GDP front, and whether companies and consumers can expect better times ahead. The New York Fed’s “Nowcast” statistical model sees Q3 growth at a very nice 13.3%. That’s something investors should consider keeping an eye on, especially with the Fed on Wednesday citing some slowdown in the recovery. Will GDP estimates start to drop? We can only wait and watch.
It’s tempting to say people aren’t seeing the forest for the trees, focusing so much on strong earnings from the FAANGs. That’s possible, but other major companies also had some good results yesterday. Some of the positive news came from Procter & Gamble (NYSE:PG), Qualcomm (NASDAQ:QCOM), PayPal (NASDAQ:PYPL) and UPS (NYSE:UPS).
CHART OF THE DAY: FAANGS DELIVER A TROUNCING: It’s not even close. Through yesterday’s session, just before four of the “FAANGs” reported outstanding earnings, the FAANGs (NYFANG–candlestick) were already trouncing the S&P 500 Index (SPX–purple line) year to date. Can this huge divergence continue? Data Sources: NYSE, S&P Dow Jones Indices. Chart source: The thinkorswim(R) platform from TD Ameritrade (NASDAQ:AMTD). For illustrative purposes only. Past performance does not guarantee future results.
A Couple More Apple Slices: One of the folks with a great understanding of the Tech sector is Angelo Zino, from investment research firm CFRA. Speaking on our media affiliate, the *TD Ameritrade Network, late yesterday, Zino called Apple earnings “as good as you could have hoped for,” with the exception of their lack of guidance. He called iPad and Mac sales, “absolutely phenomenal,” though he added it’s unclear if the heavy sales pace for those products could continue.
“Some of the June quarter strength is not sustainable,” because it reflected the initial burst of stay-at-home sales, Zino said. He expects “all eyes” to be on services in coming quarters, with wearables more of a factor, too. He also thinks iPhone sales could accelerate with the introduction of 5G, and noted that earnings comparables starting in the March quarter are going to look positive.
Is Value Gaining Momentum? Over the last few weeks, we’ve talked a lot about the possible shift toward value stocks and away from “momentum” ones like the mega-techs. That trend didn’t really show up early this week, as Tech stocks ran away with the ball on Monday. When Tech proceeded to lose ground Tuesday the value names didn’t show up to play. Energy and Financials remained under pressure amid weak bond yields and falling crude prices, while small-caps also didn’t find much of a bid. Still, value has made up some ground on the charts vs. momentum this month.
Going into the last session of July, some parts of the market that analysts have generally defined as being “value”–like Financials, Energy, and small-caps–had advanced 8%, 3% and 5%, respectively, vs. big-tech’s 5% move higher over the course of the month.
What the Tech? It’s been a while since we had a technical discussion. After making a new post-COVID intraday high near 3280 last week, the SPX has settled back below 3250, and remains kind of range-bound. There really hasn’t been a lot of willingness to try and re-test the February highs above 3300. At the same time, the Fed’s willingness to use all its tools, as it basically said this week, probably puts a decent floor under the SPX at around 3000, where it bottomed and then bounced last month.
There were a couple of scary days for the market in June, but that hasn’t repeated itself. Instead, the markets seem to be grinding their way slowly higher, but without much enthusiasm from buyers above current levels. CFRA says it sees near-term SPX support at 3212 and below that at 3124. The index needs to stay above 3124 to keep the positive momentum going, CFRA said. CFRA added that major indices continue to “oscillate back and forth without gaining much momentum in either direction.” Perfectly put.