'Crowded' megacap trade in US stocks awaits earnings test
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[April 19, 2024] By
Lewis Krauskopf
NEW YORK (Reuters) - Next week’s earnings reports from some of the
market’s biggest technology and growth companies could prove an
important test for the U.S. stock rally, which has flagged as
expectations for interest cuts fade.
Tesla, Meta Platforms, Alphabet and Microsoft - all set to report next
week - are part of the group of companies that had been dubbed the
Magnificent Seven as they led the S&P 500 to a 24% gain last year.
The companies are seen as important bellwethers due to dominant
positions atop their industries, while heavy index weightings give their
share price moves an outsize influence on benchmarks such as the S&P
500. Though the market’s rally has broadened this year, megacap stocks
remain a portfolio staple, with fund managers in the latest BofA Global
Research survey once again naming them the market’s “most crowded”
trade.
Many believe their results could be especially important to markets this
time around. The S&P 500 has slid in recent weeks, roughly halving its
year-to-date gain to 5% as stickier-than-expected inflation erodes the
prospects for the Federal Reserve to cut rates this year.
Additionally, the monthslong rally in stocks has made the index
expensive relative to history at a time when rising Treasury yields are
pressuring equity valuations. Disappointing earnings from the market’s
heavyweights could give investors less reason to hold stocks.
"Psychologically, the companies coming in at or above expectations is
important," said David Katz, chief investment officer with Matrix Asset
Advisors. "There's a lot of good news built into a lot of these
companies."
Investors will also focus on next Friday's release of the monthly
Personal Consumption Expenditures Price index, a crucial piece of
inflation data before the Fed's April 30-May 1 meeting. Fed funds
futures late Thursday were pricing in less than 40 basis points in rate
cuts this year, down from 150 bps expected at the start of 2024,
according to LSEG data.
The performance of megacaps’ shares has diverged in 2024, after last
year’s epic run. Tesla, which reports results on Tuesday, has seen its
shares tumble about 40% in 2024 amid concerns about its electric vehicle
business.
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A street sign for Wall Street is seen outside the New York Stock
Exchange (NYSE) in New York City, New York, U.S., July 19, 2021.
REUTERS/Andrew Kelly/File Photo
Meta Platforms, whose shares have jumped over 40% in 2024, is due on
Wednesday, while Alphabet and Microsoft, which are logging
year-to-date gains of about 12% and 7.5% respectively, are set for
Thursday.
Of the other megacaps, Apple and Amazon are set to report the
following week, while Nvidia, whose shares have soared 70% this year
on optimism over its artificial intelligence chips, reports on May
22.
Six of the seven, excluding Tesla, are expected to post collective
earnings growth of 42.1% in the first quarter, UBS strategists said
on April 8.
"It appears that the expectations are that they're really going to
deliver again," said Patrick Kaser, portfolio manager at Brandywine
Global. "And so the risk to me is skewed to the downside."
Excluding the Magnificent 7, S&P 500 earnings have been negative on
a year-over-year basis over the prior four quarters, according to
JPMorgan analysts, underlining the group's importance to the market.
Beyond the megacaps, over 300 S&P 500 companies expected to report
over the coming two weeks. Earnings are expected to rise 9% for the
full year, according to LSEG data, with added pressure on the
results to support overall valuations. The S&P 500's forward
price-to-earnings ratio has moderated somewhat this month but is
still at 20 times, well above its long-term average of 15.7,
according to LSEG Datastream. "In an environment where there is a
lot of uncertainty about Fed rate policy, there's a lot of
geopolitical tensions rising, if companies aren't really pushing the
pedal on giving positive outlooks for growth ... that could be the
factor that weighs on stocks," said Anthony Saglimbene, chief market
strategist at Ameriprise Financial.
(Reporting by Lewis Krauskopf, additional reporting by Chuck
Mikolajczak; Editing by Aurora Ellis)
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