Tech Investors Hedging Bets Ahead of Earnings
Tonight's earnings announcements will go a long way in determining the near-term direction of the technology sector…
Typically, when one of the large American technology companies reports earnings, it's a huge deal for the markets. But this evening, three of them release results at the same time, so there's a lot at stake.
The companies releasing quarterly reports after the close include Alphabet (GOOGL), Apple (AAPL), and Microsoft. Those three companies have roughly $6.3 trillion in combined market capitalization. And the sector makes up roughly 28% of the S&P 500 Index's weighting.
Going into numbers, the Nasdaq Composite and S&P 500 indexes have been making new highs. So, the worry by Wall Street money managers and traders is that expectations are too lofty. Microsoft is up 28.2% on a total return (dividends included) basis year to date, while Alphabet has gained 49.16%, and Apple has increased 10.4%.
That's versus a 17.5% rise for the S&P 500 and a 13.3% jump for the Nasdaq Composite. Take a look at the chart below of the Nasdaq's rally year to date:
So, the safe bet is taking money off the table… After all, in institutional investors' minds, where's the greater risk? Likely to the downside.
It's not that these big-money managers worry about earnings or demand… Granted, some hedge funds will look to short these stocks simply on gains year to date. But if any of these companies had major concerns about their earnings outlook, we would have heard a few weeks ago. Corporations typically pre-announce two to three weeks ahead of earnings.
In fact, if business at Apple and Microsoft is strong enough, they could increase buybacks and dividends.
However, if you're a long term investor, and you're up big, what's wrong with taking profits? Now that doesn't mean you exit your position, it simply means you either sell puts against your holdings or unload some of your stock. In the minds of Wall Street money managers and traders, there's nothing worse than leaving chips on the table.
If the earnings report doesn't live up to your expectations, you have the opportunity to buy back in lower. And, if the earnings report is as strong as you anticipated, you'd rather chase a stock by buying it higher than having done nothing and selling it lower.
Given the economic data we've seen from items like Markit's U.S. composite Purchasing Managers' Index, the domestic demand picture is in good shape. And based on the rebound we've seen in Europe and China, the global picture looks similar.
So don't be surprised if tonight's results are solid. Sure, the short will pick apart nuanced items. The naysayers will complain about peak growth and rising costs. But they're likely not looking at the picture versus 2019. They're only willing going off what we saw a year ago when economic activity fell apart, in order to make their case.
We'll want to keep a close eye out for any change in color in terms of the market's direction. Yet, at the end of the day, results are likely to be met with steady buying.