The Dow Is Rattled – And One Stock Could Crash the Whole Thing

July 22, 2020 11:43 AM UTC
Microsoft reports earnings tonight and it could be a make-or-break for the entire stock market. Expectations are sky high after tech-lead rally.
  • The Dow Jones Industrial Average (DJIA) opened flat on Wednesday morning.
  • Microsoft reports earnings tonight, and there isn’t much room for error.
  • After driving the entire market higher, any disappointment in tech earnings could bring it crashing down.

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.

Tech stocks have an outsized impact on the entire stock market right now. Source: Bank of America / Bloomberg

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.

Dow opens flat ahead of crucial earnings

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.

After a prolonged rally, is Microsoft’s earnings report a make or break moment for the Dow? Source: Yahoo Finance

The S&P 500 and Nasdaq each rose 0.15%.

Microsoft is the most expensive in 20 years

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.

Slack filed an antitrust complaint against Microsoft on the same day the Dow Jones tech giant reports earnings. Source: Twitter

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.”

Stock market sees temporary rotation out of tech

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.

Dow awaits Microsoft’s earnings

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.

Samburaj Das edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

Last modified: July 22, 2020 1:49 PM UTC

@_ben_brown

Ben is a journalist with a decade of experience covering financial markets. Based in London, UK, his writing has appeared in The Huffington Post and he was Chief Editor at Block Explorer, the world's longest-running source of Blockchain data. Reach him at benjamin-brown.uk, Twitter at _Ben_Brown or MuckRack. Email ben @ benjamin-brown.uk.