Investors wondering where the S&P 500 is headed, at least for the next month, will want to pay attention to three key days this week.
Between Tuesday and Thursday, five major technology companies with a combined market value of more than $10 trillion will report earnings: Microsoft Corp., Alphabet Inc., Meta Platforms Inc., Amazon.com Inc. and Apple Inc. Meanwhile, the Federal Reserve will release its interest rate decision, followed by Chairman Jerome Powell’s press conference where he is expected to discuss the future outlook.
The stakes couldn’t be much higher, with the S&P 500 pushing deeper into record territory thanks to bets that central bankers are ready to start easing monetary policies and tech giants like Microsoft becoming every most precious days.
“Technology moved the market disproportionately last year and big tech continues to have the most earning power, so the results will be crucial for markets,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.
After a shaky start to the year, the S&P 500 index is on the rise again and is recording a third monthly rise having seen an increase of more than 18% since the end of October, when the index hit a short-term low deadline before Fed officials began signaling that rate hikes were underway. Above.
The rally is once again led by megacaps including Microsoft, Alphabet, Amazon.com, Nvidia and Meta Platforms, responsible for most of the index’s 24% gain last year, as investors became fascinated by the possibilities of services of artificial intelligence. The so-called Magnificent Seven, which also includes Tesla Inc., just hit a record 29% of the S&P 500 despite a plunge in shares of the electric vehicle maker that wiped out more than $200 billion in market value just this month.
Booming AI
Microsoft and Alphabet will report earnings on Tuesday after the markets close. The two companies are among the best positioned to benefit from the AI boom after investing heavily in the sector for years. Microsoft has been adding features to its suite of software products, and investors are betting that artificial intelligence will soon start boosting profits and sales growth.
On Wednesday, attention will shift to the end of the Fed’s January meeting, where it is expected to keep interest rates stable for the fourth consecutive meeting. Traders will mostly focus on what Powell and other policymakers have to say about the timing of easing. Recent data showing inflation continuing to decline and resilient U.S. economic growth suggests central bankers will be in no rush to cut interest rates.
Apple will be the main attraction on Thursday, while Amazon and Meta Platforms, owner of Facebook, will also give their reports in the afternoon. The iPhone maker has been dogged by concerns about revenue growth and is expected to report its first sales expansion in four quarters.
With most megacaps in record territory, there are concerns that investors are overexposed to just a handful of stocks, which could open the door to some pain if quarterly results disappoint.
Magnificent Seven stocks were again named the busiest trades in a Bank of America survey of fund managers, according to a research note released by the bank last week.
No protection
However, according to options market data, traders are in no rush to secure downside hedges.
The indicator of Apple’s expected price movements in the next three months is hovering near the lowest level in six years. Traders expect the stock to move 3.3% in either direction a day after the results, which would be among the sharpest post-earnings swings in two years.
Expected three-month volatility in Meta Platforms, which has more than quadrupled since its November 2022 low, is at its lowest level in two years. The cost of protecting against a 10% drop in Microsoft next month is hovering near its lowest level since August compared to the cost of options that profit from a similar rally.
Tesla demonstrated the risks last week after missing fourth-quarter profit estimates and warning that its sales growth would be “significantly lower” in 2024. The stock fell 12% the next day, the steepest drop big in a year.
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Microsoft recently overtook Apple as the world’s most valuable company, with a market value of more than $3 trillion. The rally has made the stock even more expensive, at 33 times expected earnings over the next 12 months compared to an average of 24 times over the past decade.
For Jason Benowitz, senior portfolio manager at CI Roosevelt, there’s no question that the megacap market is crowded. But that doesn’t mean stocks can’t continue to rise as economic growth slows and financial conditions ease.
“There’s a good reason for the crowded trade,” he said. “The environment is good for them.”