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Dow Caves Because Earnings Season Doesn’t Get Bigger Than This

Last Updated September 23, 2020 2:09 PM
Josiah Wilmoth
Last Updated September 23, 2020 2:09 PM
  • The Dow Jones collapsed on Thursday, falling more than 500 points.
  • Quarterly GDP plunged by the worst mark on record.
  • Apple headlines the biggest day of the second-quarter earnings season.

The Dow Jones Industrial Average (DJIA) suffered a violent downturn on Thursday. With Amazon, Alphabet, Apple, and Facebook all set to report their results after the bell, Wall Street is bracing for the biggest day of what analysts expect to be the ugliest earnings season since the financial crisis.

These four tech titans boast a collective market cap of nearly $5 trillion. They make up around 15% of the S&P 500’s total valuation. Apple commands an almost 10% weighting in the Dow all by itself.

dow jones, stock market earnings
More than a quarter of the S&P 500’s market cap reports earnings today. | Source: Yahoo Finance 

And if that cocktail wasn’t enough to make investors’ blood run cold, the government mixed in the most titanic quarterly GDP decline economists have ever seen. Records go back 70 years.

Dow Plunges More Than 500 Points

Stock futures turned lower overnight, and then outright collapsed after the market opened.

Off more than 500 points at its lows, the Dow Jones Industrial Average was down 480.58 points or 1.81% as of 10:04 am ET. That brought the index down to 26,058.99 – and within a hair of giving up the 26,000 handle.

dow jones today
The Dow Jones collapsed more than 500 points on Thursday. | Source: Yahoo Finance 

The S&P 500 fell 1.5% to 3,209.7, while the Nasdaq dropped 0.98% to 10,437.72 as risk sentiment darkened on Wall Street.

Worst GDP Crash on Record Exposes Grisly Economic Damage

The U.S. government set the tone on Thursday with a duo of stomach-churning data releases.

  • Weekly jobless claims hit 1.434 million.
  • Advance quarterly GDP dove 32.9%.

Neither of those readings was a surprise. The pandemic and corresponding lockdown guaranteed it would be a brutal quarter.

Fed Chair Jerome Powell conceded as much yesterday when he called it the most severe economic crisis “in our lifetime.” Including the present one, Powell – who was born in 1953 – has lived through 11 recessions.

Where Apple Earnings Go, So Goes the Dow Jones

John Traynor, chief investment officer of People’s United Advisors, told CNBC that amid the earnings tsunami and data deluge, Thursday is really about one thing: Apple. 

The No. 1 company for us, because we think they’re such a bellwether, is Apple.

We expect to see, historically speaking, a lighter quarter, but they’ll hopefully give us some indication of what the fourth quarter will look like. Apple gives us such great insight into the economy and tech spending.

Traynor’s commentary exemplifies how investors are treating this particular earnings season. Aside from a few perfectly-positioned companies – Amazon comes to mind  – the results aren’t going to be pretty.

What shareholders want to hear is that this past quarter represented the worst of the crisis and that performance should bounce back during the remainder of the year. What they don’t want to hear is anything that darkens the outlook for the recovery.

The best example of this comes from another Dow Jones stock, Intel. When the chipmaker reported earnings last week , it actually beat Wall Street’s expectations. The stock collapsed as much as 18% anyway, not because of anything that happened in the past, but because of what wouldn’t happen in the future.

Intel’s chip manufacturing delay was defect-related – not the result of the pandemic. It’s still a roadmap for the type of turmoil stocks like Apple could encounter if the pandemic leads to delays in massive product launches, like the 5G iPhone.

Wedbush analyst Dan Ives has a $450 price target on Apple stock, but even he conceded this all rests on the iPhone 12’s anticipated launch. 

At the end of the day, the Apple growth story (and stock) moving higher all rests on the iPhone 12 ‘supercycle’ coming down the pike which we believe is the most significant product cycle Cupertino has seen since iPhone 6 was released in 2014.

Stock Market Slams Into a Seasonal Headwind

Leading into today’s earnings report, Wall Street – Dan Ives excluded – doesn’t think Apple has much more room to run. According to TipRanks data, the consensus price target on AAPL shares is $378.55, slightly below the $380.16 mark they closed at on Wednesday.

Technically speaking, that consensus target might be a bellwether for the overall stock market.

David Bahnsen, chief investment officer at the Bahnsen Group, wrote in a Wednesday evening report  that the S&P 500 is about to slam into a seasonal headwind.

stock market, S&P 500
The stock market is entering a period historically marked by choppy price activity. | Source: Strategas Research via the Bahnsen Group 

“Sell in May and go away” might not have been a wise strategy this year, but history suggests growth is going to be hard to come by this quarter.

Bahnsen wrote that investors should expect “choppy/flattish” price action over the next few months:

The market has moved further above its 50-day and 200-day moving average, giving those who believe in technical analysis less excuse for non-bullishness, but the put-call ratio remains extremely low (indicating too much complacency, and therefore for contrarians, a short term risk). This time of year into an election season generally becomes choppy/flattish, but I would argue that was likely to be the case even apart from the election dynamic.

Then again, 2020 has been anything but a typical year.