By Lewis Krauskopf
NEW YORK (Reuters) – The Wall Street rally faces a new test next week with a flurry of earnings reports from major US companies, including the tech and internet giants that recently regained market leadership.
More than a third of the S&P 500 will publish quarterly results next week, led by Apple, Microsoft, Amazon and Google parent Alphabet, the four largest US companies by market value.
Those stocks were up between 5% and 7% this month through Thursday’s close of trading, while the S&P 500 was up just 1.6%. The equally weighted S&P 500 index, a barometer of the average stock, was down 0.2%.
“The expectation level for these names is a lot higher than it was a month ago given their stock performance, so I think they have to deliver,” said Walter Todd, chief investment officer at Greenwood Capital in South Carolina.
“It’s a question of looking ahead: can you live up to the expectations that share prices are reflecting?”
The strength of these big stocks came amid worries about a slowing US economic recovery, which helped push benchmark government bond yields this week to their lowest level since February before recovering somewhat.
As the delta variant of COVID-19 sweeps across the United States, the economic outlook will be the focus of the Federal Reserve’s Tuesday and Wednesday meeting, another pivotal event for investors looking for clues as to when the central bank is making its easy head Money could contain guidelines.
Although the S&P 500 is at record levels after rallying more than 95% from its March 2020 lows, stocks have suffered more volatility in the past few days as investors tried to reconcile the bond market’s signals about the economic outlook.
Indeed, below the surface stock performance suggests some doubts about economic strength. Growth stocks that have led the market for years amid sluggish economic growth outperformed economically sensitive value stocks in July, while smaller stocks, which tended to be harder hit by the US economy, also lagged, such as the small-cap Russell 2000 that month down by over 4% so far.
“Investors have been looking for … security in these megacaps, especially the megacap technology companies that are expected to continue to grow very strongly,” said Tim Skiendzielewski, investment director at Aberdeen Standard Investments in Philadelphia.
The dominance of Megacap stocks also raises concerns that the broader index may be more dependent on the fate of some giant tech companies.
The market capitalization of five companies – Apple, Microsoft, Amazon, Alphabet, and Facebook – was most recently 24.6% of the S&P 500’s market capitalization, almost as high as it was in 2021.
Less than half of the stocks in the S&P 500 recently traded above their 50-day moving averages, even though the index was at or near new highs, compared with over 90% in April, a sign that “what is happening below the surface.” is “in contradiction to the image of strength that can only be portrayed with the usual average values,” says Willie Delwiche, investment strategist at the market research company All Star Charts.
At the same time, bullish investors can point to a strong start to a profitable season that was expected to show a strong recovery from the pandemic. With 120 S&P 500 companies reporting so far, earnings in the second quarter are likely to be up 78.1% year over year, up from 65.4% earlier in the month, according to Refinitiv IBES data.
Other heavyweights reporting next week include Facebook, Tesla, Visa, Exxon Mobil, and Pfizer. With concerns over the strength of the economy, investors will focus on company expectations for the rest of the year and through 2022.
“We may not see many quarters of 70% earnings growth in the future, but that still doesn’t mean we expect negative earnings growth,” said Anu Gaggar, global investment strategist with the Commonwealth Financial Network, reflecting continued healthy economic conditions contrary.”
(Reporting by Lewis Krauskopf; editing by Ira Iosebashvili and Nick Zieminski)