If the stock market is priced to perfection, then Microsoft (NASDAQ: MSFT) needs a home run when it reports earnings tonight. Investors are a little nervous going into today’s session, with Dow the Jones Industrial Average (DJIA) opening flat on Wednesday.
It’s no stretch to say that Microsoft’s quarterly update is a big moment for the entire stock market. Tech has headlined the rebound since the March selloff. Now it needs to come through with cold, hard numbers.
Any disappointment could ripple through the entire market. Especially when you consider that Microsoft, Apple, Google, Amazon, and Facebook now make up ~25% of the entire S&P 500.
Of course, the opposite is also true. A surprise to the upside could see tech stocks run even higher.
After yesterday’s strong session, the Dow took a breather on Wednesday. After opening flat, the index crept modestly higher.
As of 9:44 am ET, the Dow had gained 43.19 points or 0.16% to climb to 26,883.59.
The S&P 500 and Nasdaq each rose 0.15%.
Dow Jones component Microsoft hasn’t been this expensive going into earnings since the dot-com bubble. So there isn’t much room for error in tonight’s update.
That’s even more true after Slack filed an antitrust complaint against Microsoft in the European Union today.
But does MSFT’s expensive valuation matter? As CEO Satya Nadella said in the last earnings call, we’ve just witnessed “two years’ worth of digital transformation in two months.” Perhaps the valuation reflects that shift.
Brian Belski Of BMO Capital Markets isn’t worried about tech valuations:
Clearly [tech is] leading, but they’re leading for a good reason. They are fundamental, secular, category killers. They were strong before Covid, during Covid, and they’re going to be strong after Covid.
Everyone is desperate to compare today’s market to the dot-com bubble. But the fundamentals are completely different now, argues Belski. He said the bears need “more imagination.”
The Dow outperformed the Nasdaq yesterday in a tell-tale sign of market broadening. Investors rotated out of tech and into cyclicals and value stocks. This is something Francis Tan UOB has been advising lately.
I have been suggesting to clients to take some profits off the table in the US technology sector.
Does this mean a bigger tech selloff is coming? Not necessarily. Jeff Tomasulo at CEO Vespula Capital thinks it’s a welcome move.
That’s actually really healthy for the markets. People start to take profits in stuff that has gone up tremendously and starts to put it into areas they find value, and that’s small cap and the S&P 500.
Expect volatility when Microsoft reveals its fiscal 4th quarter results. Options traders are pricing in a 4% move either way for the stock and it could dictate the next big wave of capital flow.
Investors might double down on tech if the results surprise to the upside. Or they might flee the sector if earnings disappoint.
Wall Street is expecting earnings of $1.38 per share on $36.64 billion revenue. However, the ‘whisper number’ is $1.50 so the bar is high.
The early signs from the sector are good after IBM beat expectations earlier this week. High demand for cloud services across the board is likely to benefit Microsoft, whose cloud business grew 59% last quarter.
Tesla also reports earnings after the bell tonight.
Last modified: July 22, 2020 1:49 PM UTC