Big week for earnings

29 Jul

It has been a feature, or perhaps more correctly a worry, of the US equity market that post-Covid gains have been driven by a small selection of tech stocks. Less than a month ago, the five largest corporations by market capitalisation, accounted for over 20% of the value of the S&P 500. Understandably, this concentration of risk caused many analysts to express their concerns, saying that this was an unhealthy, and potentially destabilising, situation. So the tech-led sell-off which greeted the benign CPI reading in mid-July had the potential to avalanche. Investors began to cut their exposure to the mega-caps. But there was no panic, as proceeds from high-priced tech were funnelled into small and mid-cap stocks, helping to boost the domestically-focused Russell 2000. This rotation has helped to broaden stock market gains, raising hopes that this year’s record-breaking bull run may still have plenty of upside. Even as the tech sell-off accelerated following last week’s poor Tesla numbers, and some disappointment from Alphabet, losses were offset by gains in smaller stocks. Last week the Russell 2000 added 3.5% while the NASDAQ 100 lost 2.1%. Is the ‘Great Rotation’ set to continue? It certainly faces a big test this week with four ‘Magnificent Seven’ constituents set to report: Microsoft tomorrow, Meta on Wednesday, Apple and Amazon on Thursday. Much depends on investor sentiment. Has the tech sector pulled back enough for investors to buy again, irrespective of earnings? Will further disappointments trigger another wave of selling? If the latter, will funds continue to pour into smaller stocks? There’s a lot to consider. And that’s before adding in monetary policy meetings from the Federal Reserve, Bank of Japan and Bank of England, and US Non-Farm Payrolls on Friday. This may prove to be the decisive week ahead of the summer’s main holiday month.