It’s a crucial week ahead for global stocks as companies worth trillions of dollars prepare to release their quarterly earnings. The pressure is on for these companies to deliver strong results or face a significant sell-off, as demonstrated by Netflix and Tesla last week. Over 500 major companies worldwide, including Microsoft, Google-parent Alphabet, LVMH, Banco Santander, Volkswagen, Airbus, Sanofi, and Samsung Electronics, will unveil their performance for the quarter and provide insights into their expectations for the coming months.
Morgan Stanley’s Michael Wilson believes that cost-cutting measures alone will not be sufficient to drive stock prices higher. Expensive valuations mean that stocks will require more confirmation of the anticipated upturn in growth in the second half of the year. Wilson, known for his bearish views on US equities, highlighted that while S&P 500 earnings have surpassed estimates at an above-average rate this season, only 42% of stocks experienced a positive post-earnings reaction, down from 49% in the previous quarter, according to Morgan Stanley’s analysis. Wilson added, “This aligns with our thesis that ‘better-than-feared’ results likely will not be sufficient to materially boost performance post-reporting.”
The recent earnings reports from Netflix and Tesla, the first two Big Tech mega-caps to report, provided a glimpse into how the market can react to earnings shortfalls or disappointing guidance. Despite both companies having strong performances earlier this year, Netflix’s third-quarter sales guidance fell short of estimates, and Tesla warned of further profit hits. The decline in their shares triggered a broader sell-off that wiped out over $400 billion (€360 billion) from the Nasdaq 100’s market capitalization in a single day.
James Athey, investment director at Abrdn, anticipates that a significant proportion of earnings will surpass estimates, but he cautions that this may not be enough to satisfy the lofty valuations in the market. He stated, “If guidance shows any sign of concern, that could be enough for investors to flee those stocks.” The stakes are particularly high for heavyweight US technology firms, which have been the driving force behind the Nasdaq 100’s 41% gain this year. The so-called “magnificent seven” – Apple, Amazon, Nvidia, Meta Platforms (formerly Facebook), Microsoft, Alphabet, and Tesla – now trade at a record premium compared to the bottom 493 stocks in the S&P 500.
In conclusion, this week’s earnings reports from major companies worldwide will be closely watched as investors seek confirmation of growth expectations. The market has become increasingly difficult to impress, with mere “better-than-feared” results unlikely to provide a significant boost to stock performance. The reactions to Netflix and Tesla’s earnings reports serve as a reminder of the potential impact on the broader market. Investors will be particularly focused on the guidance provided by heavyweight US technology firms, which have been driving the market’s gains.