FAANGs' Final Fling: Amazon, Alphabet Wrap Up Earnings Season For "Mega-Caps" Later Today

The big story last week was a dramatic spike in volatility. Today, that appears to be unwinding quickly, perhaps lending some initial strength to the stock market. Futures on the major indices are advancing in the early going, and the Cboe Volatility Index (VIX) has moved back to the “calm side” of 30, starting the day with a 27 handle.

The plunge in volatility came as a couple of the big speculative plays from the last few days also appeared to come unwound. GameStop Corp. GME shares collapsed 40% in pre-market trading. Silver is also getting pounded, a day after what looked like a mini-boom. Hopes for progress on a fiscal stimulus and a generally positive earnings picture could be injecting new life and helping investors put last week’s crazy trading behind them, at least early on. 

It’s another action-packed earnings day on Wall Street, dominated by Amazon.com, Inc. AMZN and Alphabet Inc GOOGL after the close. Don’t forget Pfizer Inc. PFE this morning, which might be a good chance for an update on vaccine progress and production.\ 

Looking at the early earnings scorecard today, Alibaba Group Holding Ltd BABA beat analysts’ estimates across the board but the stock’s down a little. PFE raised its view for the year, which is good. United Parcel Service, Inc. UPS numbers didn’t look great at first glance but the company had a one-time charge. Beyond that it looked like a solid quarter. Exxon Mobil Corporation XOM also had good earnings.

Overall, we seem to be having a good earnings season, not a great one. People are happy to see progress and hear CEOs talking about good things to come. Stocks haven’t been getting a major bump from earnings results, but there was a big runup going into the season, which could explain that. 

Turning The Dial

Yesterday felt like easy listening on the radio again after the heavy metal thunder of last week, but it isn’t necessarily static-free. Volatility, even with today’s turn lower, remains well above where it was a week ago. 

Also, bond buying came back into the picture yesterday before retreating this morning. The 10-year Treasury yield ticked down to 1.07% on Monday before jumping back up to 1.11% this morning. Sometimes the bond market can be a good barometer of investor sentiment, and right now it does feel like things have turned around a bit since yesterday. This morning’s yield rally could potentially put Financial stocks and the Russell 2000 (RUT) small-cap index in line for some support. 

Now that you’ve read the fine print, it was good to see some stocks like Apple Inc AAPL and Microsoft Corporation MSFT rebound after neither got any market credit for their solid earnings reports last week. There isn’t always just one reason why shares fall after a company surpasses earnings expectations, and plenty of theories got offered during the swirl of events that hit Wall Street the last few days. 

One idea, especially for AAPL, is that the stock had simply built in most of the good news ahead of time and fell victim to a bit of profit taking. One thing to note as more “FAANGs” report later today (see below) is that the mega-caps like AAPL, its fellow FAANGs, and MSFT continue to dominate from a market capitalization standpoint, which means how they do on any given day often helps shape the overall market.

Technically, it was positive Monday to see the SPX bounce off of its 50-day moving average near 3716, but keep in mind that it wasn’t able to come back and close above the 20-day moving average, now near 3792. It looks like the market is trying to find a trading range, and the SPX remains only about 2.5% below the all-time high posted last month. A close above 3792 today might suggest additional strength.

“Stay at home” stocks like the FAANGs and semiconductors did well yesterday, but you can’t really say it was just a stay at home rally. Not when you saw the RUT also bounce back in a big way. Consumer Discretionary also had a nice day, though that’s a mix of reopening and stay at home companies. Or “drive-up” companies, shall we say, considering the way things look now at many big box stores. 

FAANG Earnings Wrap Up Today With Alphabet, Amazon

Earnings afternoons don’t come much bigger than today, when Amazon (AMZN) and Alphabet (GOOGL) open their books. 

AMZN is expected to exceed $100 billion in quarterly revenue for the first time ever in Q4 according to AMZN’s own quarterly guidance. Net sales are expected to be between $112.0 billion and $121.0 billion, or to grow between 28% and 38% compared with Q4 2019, though the company noted $4 billion in COVID-19 related costs are expected for Q4.

Both holiday sales and the company’s Amazon Web Services (AWS) cloud business are likely to be the focus when AMZN reports, but you might also want to monitor the company’s earnings call for the latest on other businesses like payments, fintech, or the company’s entry into the pharmacy segment. AMZN has also offered to help distribute the COVID-19 vaccine, but there haven’t been many details about this. The call could provide more insight.

With GOOGL, we’ll see if ad revenue continued to bounce back after a strong Q3. GOOGL’s Q3 ad revenue of $37.1 billion—up 10% year over year following Q2’s negative 8%—appeared to indicate a revival from the pandemic damage of Q2. Ad revenue for Search and YouTube both looked strong in Q3, so the question is whether that momentum lasted into the end of the year. GOOGL crushed Wall Street’s expectations last time out, so that might put some pressure on them to do that again or risk disappointing the Street. 

Word From The Factory Floor

The manufacturing economy slowed just a little last month, but remains in pretty decent shape all things considered. When you look at a reading like yesterday’s headline number of 58.7 from the Institute of Supply Management, it’s tempting to be disappointed because it fell from 60.5 the prior month and came in a bit below analysts’ estimates.

If you put it in context it gets a little easier to like. It’s still well above the 50 level that signifies expansion, and the previous month’s was the highest in three years. Solid growth in ISM like we’ve been seeing is often a positive sign that companies are out there spending and getting ready for heavy demand. 

It isn’t just in the U.S. where you see signs of manufacturing strength. Recent readings out of Europe and China also showed expansion, though China’s data fell slightly in January from December. Analysts said the slight dip in manufacturing activity early this year might have reflected pandemic-based shutdowns in some regions.

CHART OF THE DAY: FOLLOW THE LEADER. The NYSE FANG+ Index ($NYFANG:IFUS—candlestick) has regained its place as a “leading indicator” for the overall market over the last couple of years, and that’s been apparent over the last week. The FAANGs stumbled, and so did the broader market, demonstrated here by the S&P 500 Index (SPX—purple line). When FAANGs regained their feet yesterday, so did the SPX. Data Sources: S&P Dow Jones Indices, NYSE. The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Right Where 2020 Left Off: The initial public offering (IPO) mania that gathered steam late last year doesn’t show signs of cooling so far in 2021. Companies have raised $13.4 billion through 24 IPOs so far this year, a 300% jump in listings from the same period last year, The Wall Street Journal reported, citing data from Renaissance Capital. The WSJ added that  “blank-check companies” continued to flood the market, with 91 gathering about $25 billion, nearly a third of the value raised throughout all of last year, according to SPACinsider.com. And there have been 111 offerings of additional shares by U.S.-listed companies, doubling the number from the same period a year earlier, Dealogic data show.

In other words, the market remains abuzz, so to speak, with lots of new companies and a lot of investors looking for places to put their money. There’s still a lot of cash on the sidelines, analysts say, including possibly as much as $5 trillion in money market funds earning nearly zero interest. When there’s so much cash looking for a home, it can sometimes lead to the disjointed situation we saw in the markets last week. And to higher than normal values for everything from stocks to silver (as we saw Monday). As a long-term investor, there’s nothing wrong with trading some of these IPOs and even commodities, as long as you keep the golden rule in mind. Don’t put in more than you can afford to lose. And stick with your long-term plan.

Beyond Vaccines to Therapies: Vaccines dominated the news last week, but don’t overlook coming data on possible COVID-19 therapies. Merck & Co., Inc. MRK is working on an experimental antiviral drug known as molnupiravir, The New York Times recently reported. Originally designed for influenza, it has shown promising effects in studies on animals and in early clinical trials. The trial is set to finish by May, although preliminary results could come out as early as March. Merck is developing molnupiravir in collaboration with Ridgeback Biotherapeutics LP, a biotechnology company experienced in anti-viral drug development.

Antibody drugs have also been studied in the disease, but haven’t shown much benefit so far treating COVID-19  “Eli Lilly And Co LLY and Regeneron Pharmaceuticals Inc REGN have antibody cocktails that are only beneficial in certain types of patients, and those patients are hard to identify,” said Kevin Huang, analyst with research firm CFRA. 

LLY’s drugs belong to a class of biotech medicines called monoclonal antibodies widely used to treat cancer, rheumatoid arthritis and many other conditions. A monoclonal antibody drug developed against COVID-19 is likely to be more effective than repurposed medicines currently being tested against the virus, some analysts say. 

Stimulus Moves to Front Burner: All of last week’s volatile trading, earnings, and vaccine news pushed politics into the background from the perspective of Wall Street. That could change in the coming days as the Biden administration seems pretty keen to get some sort of stimulus quickly through Congress. Media reports suggest Democrats might try to move the $1.9 trillion legislation through the reconciliation process, which would require just a majority of Senate votes. You might remember this was the process Republicans used in 2017 to pass tax cut legislation without Democratic support. Republicans met with President Biden yesterday and told the media they were hopeful after talks.

Though stimulus might have been lost in the shuffle last week on Wall Street, don’t count on that happening again now. Any sign of pending progress could give markets a boost and reinforce a “buy the dip” mentality following recent weakness. Keep in mind that a move toward stimulus could give Treasury yields a boost, potentially helping the Financial sector. That’s what happened late last year when the previous round of stimulus gained traction in Congress. Stay tuned.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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