It was a very interesting day in the stock market yesterday. It opened nicely higher after we got some very positive earnings news out of companies like GOOGL and AMD. However, the rise faded throughout the morning…and the S&P 500 actually fell to the “unchanged” level just before noon. Then, it was able to bounce from that level…and gave us a slow and steady rise over the afternoon. This took major averages above their morning highs by midafternoon…and helped them all close at their highs of the day.
As the market moved steadily higher in the afternoon, we wondered out loud whether traders were setting themselves up for another “earnings rally” on Thursday. Let’s face it, the market had rallied nicely in the morning after MSFT, AAPL, and GOOGL reported…so why wouldn’t it rally nicely after FB reported earnings as well? In many ways, it made perfect sense for short-term traders to make this bet.
However, as we all know by now, FB missed badly last night…and the stock is trading lower by more than 20% as we write. This has caught many short-term traders offsides…and it is likely to lead to a very rough morning today. We’re not just talking about the opening. If the market does not bounce immediately, we could easily see some continued selling in the hours after 9:30.
The real question is whether the earnings out of FB has an impact on the confidence of all market participants…not just short-term traders. There has been a feeling in the marketplace recently that earnings would be the catalyst to bail us out this correction. Ever since we saw that HUGE intraday bounce on Monday the 24th…which was followed by a strong reaction to MSFT’s earnings (and the same for AAPL’s earnings two days later)….a lot of investors seemed to think that another strong earnings season would create the kind of rally that the previous quarter’s earnings report did for the market at the end of last year.
We have been saying that we didn’t think earnings would help as much as the bulls thought it will. The main reason we have been saying this is because future earnings have not been raised during the last two earnings seasons. (We should actually say, the last 1 ½ earnings season…as this is certainly not over yet.) That’s right, as fabulous as the last earnings season was, the guidance was not good enough to lead the consensus estimates for 2022 to rise. The same is true so far during THIS earnings season so far. The consensus estimates for 2022 on the S&P 500 has been in the $220-$225 range since the late summer…and it has not moved up at all since then. This is a big change compared to the first two reporting seasons of 2021…when earnings estimates rose by 20%.
In other words, it has been our argument that although earnings have certainly been fabulous in 2021, we’re seeing strong evidence that we will not see anywhere near the same kind of improvement in 2022. Either way, it really didn’t matter to our thinking on this issue. Even if earnings estimates DID grow by another 18%-20% in 2022, it still would have left us with a multiple of 20x earnings when the S&P was at 4,800. We just didn’t see how the market could rally significantly from that level…with a 20 multiple…especially given that the Fed was moving from its most accommodative policy EVER…to one of tightening (without stopping at neutral in between).
Therefore, as we alluded to above, the question is whether FB’s earnings are something that is going to take a lot of confidence out of the minds of investors of all timeframes. (Short-term traders…long term investors…and everybody in between.)…..Let’s face it, FB is not some company that went public 6 months ago. They’ve been public for a decade…and they’ve been a very important company for much longer than that. Stocks like this RARELY fall 20%+ on their earning reports…like some newer (or smaller) companies can from time to time. This kind of decline is something that could cause many different types of investors to step back once again…and look at the real situation that exists with earnings.
Having said all this, we do get AMZN’s numbers tonight. Maybe their numbers can restore the kind of confidence that is needed to give the recent bounce in the stock market more life. Of course, AMZN is not known for caring about their earnings on a short-term basis as many other companies are…but maybe this has changed under their new CEO. However, given the action in the stock since Mr. Jassy took over, it looks like he’s more interested in the long-term interests of the company…than the shorter-term movement of the stock (which should be the priority of all CEO’s).
We have no idea how good or bad AMZN’s earnings report will be tonight. To be honest, we don’t think it will make much difference after this week. Either way, there signs are out there that the fabulous earnings growth that we saw in 2021 are something of the past. This does NOT mean that earnings are going to roll-over in a significant way by any means. However, it seems to us that the stock market needs earnings to improve in a substantial manner if the stock market is going to rally back above its recent highs. In fact, we believe that if earnings merely reach the estimates that exist today, the market will have to fall further…now that interest rates will be heading higher with the Fed’s new tightening policy.
In other words, the earnings out of FB might be an important inflection point in the stock market. If this report leads more investors to turn to our way of thinking, it’s likely going to lead to lower-lows in the stock market before very long. If investors come to the conclusion that earnings growth is not going to be as good as they thought in 2022, it’s going to cause them to reconsider their investment strategy going forward. That, in turn, will cause more of them to de-risk and de-lever their portfolios.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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