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Why Tech Earnings Will Decide the Next Market Narrative

Right now, tech earnings are the wild card...

Big market moves are usually paired with an element of surprise.

When the market trades on a narrative or belief, it becomes complacent. Then, when proven wrong, it rushes toward the exits… all at once.

It’s how you get a short squeeze, like the one we saw on March 24, 2020.

After realizing the Fed had its back and that COVID-19 would not keep us down, the market never looked back.

But it’s also how we got the type of meltdown we saw this year when the market was still complacently trading at its highs.

Then, it was surprised by the amount of rate hikes coming from the Fed, and quickly crashed…

Right now, it looks like there’s some groupthink brewing in the markets.

Below are headlines from mainstream outlets that are making me expect a similar surprise…

Analysis: Investors worry that U.S. profit forecasts are too high – Reuters on June 16

Earnings Estimates Are Too High. These Sectors Could Get Whacked – Barron’s on July 8

Wall Street earnings estimates are too high given recession expectations – CNBC on June 15

But at the end of the day, all the market wants to know is one thing… how much does it have to pay for earnings?

So, when investors say the market is “overpriced,” they’re usually using some historical averages as their reference point.

Meaning, if valuations are too far above long-term averages, then they’re viewed as expensive.

That was the case in early January of 2022.

Take a look at this chart of the S&P 500 price-to-earnings (P/E) historical ratio…

The average multiple over the last 30 years was around 17.5X. Now, we’re at 16.5X.

They’re no longer overvalued.

If that’s the case, then the previous headlines explain why the market isn’t in a rush to buy.

Investors are worried we’re in a “valuation mirage.” It’s when analysts make bad valuations look good by being too optimistic about earnings estimates.

That’s why on July 14, the market was trading at 3790 as it headed into earnings season. It was still down 22.5% on the year, and threatening new lows if earnings confirmed the fear.

Except, something funny happened…

Most companies started to beat estimates. This is why the market is up 4.5% since earnings began.

And if tech earnings follow suit, we could be in for a big third quarter.

Right now, tech earnings are the wild card. And so far, the only reported ones with importance are from Snap (SNAP) and Tesla (TSLA).

TSLA had less of a market impact than SNAP did. It barely moved the market… while SNAP’s earnings set a negative tone for Friday, which carried over into the Nasdaq on Monday.

That’s because SNAP reported a miss in ad revenue. Ad revenue is the bloodline for companies like Meta Platforms (META), Alphabet (GOOGL), and other companies that generate cash flow from ad sales.

So, playing this has gotten complicated and has opened the door for the narrative to have validity.

And it’ll all come to a head this week.

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As far as I’m concerned, earnings season will end this Thursday after the market closes with Apple (AAPL) and Amazon (AMZN) earnings.

There’ll be more announcements. But none will move the market more than big tech.

After this week, either the narrative holds and downside momentum continues (probably reaching new lows) – or we’re making up a lot of lost ground from the first half.

As I’ve mentioned recently, we’re in the middle of the seventh relief rally of the year.

Unlike the last six, the market actually bought the lows on this one.

Right now, the big support level is at 3750 on the S&P 500 after testing on five separate occasions. At the moment, the market has some cushion. We’re 5% above that support level. 

But yesterday’s Volatility Index (VIX) analysis from Jeff Clark made me want to take profits on these recent positive earnings surprises.

The VIX looks like it could snap back. It seems the market doesn’t want to go all-in before big tech has reported.

And I share that sentiment.

But I’m rooting for a big, short squeeze… with one finger on the buy button and the other ready to sell.

Regards,

Eric Shamilov
Analyst, Market Minute

Reader Mailbag

In today’s mailbag, readers share their thoughts on Jeff Clark’s essay about the U.S. government’s handling of our money

I enjoyed your comments about social security and the robbery it represents. I made those same calculations a year ago. Here’s some other things I discovered:

The breakeven point for benefits is 80 years old. No matter when you start receiving social security, at age 80 you’ll have received the same total amount of benefits. So, waiting to retire – and getting a higher payout – only helps if you live longer than 80 years. Your marginal increase in aggregate benefits only begins to accrue after you turn 80.

By law, the social security fund can only be invested in U.S. government securities. How ironic is it that Congress holds rates at negligible levels, then complains that social security is going bankrupt!? If social security had been allowed to invest at least some of its funds in say, the S&P 500, there would now be a great surplus in the fund!

Along those same lines, when social security invests in U.S. government securities, it’s essentially loaning the Federal Government money, with no limits as to what the Feds can do with those funds

– James W.

Well said, Mr. Clark. Unfortunately, a lot of Americans have to rely on the social security check for a substantial portion of retirement. Poor choice or not, eventually some of us come around and begin investing to bridge the gap.

And thanks to guys like you, and ultimately firm reliance on our creator, we are thankful to live another day within our means. As well as prosper to help others on life’s journey, as we can’t take it with us for the final ride in the hereafter. Thank you, sir, for all your help to the little guys.

– Bill M.

Great writing. I’m an accountant and I’ve been preaching this for 30 years.

– Robert M.

Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at feedback@jeffclarktrader.com.