Afternoon Face-To-Face with Facebook, Fed Chairman Powell, Next On Calendar

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

There’s going to be a slight interruption in the earnings parade later today when the Fed concludes its meeting. 

The question is whether the Fed might say anything about tapering its stimulus later this month at its Jackson Hole symposium. Today’s statement and Fed Chairman Jerome Powell’s press conference could provide insight into the timing of a future policy announcement. More about the Fed below. 

Before the Fed meeting, the focus remains on earnings following Tuesday’s reports from three of the largest companies in the world and a surprising quarterly profit this morning from Boeing BA. If you were looking for more evidence that big-Tech continues to thrive, Tuesday afternoon’s trifecta of earnings from Apple AAPL, Microsoft MSFT, and Alphabet GOOGL might have gone a long way. 

Though all three mega-cap companies over-delivered on Wall Street’s expectations, the market results arguably didn’t reflect the standout reports. Two of the three stocks fell initially after releasing their results, though MSFT managed to get back into the green later in the after-hours session. AAPL shares remain slightly lower in pre-market trading. 

By now you’re probably familiar with the numbers each of these behemoths announced late yesterday, so we’ll spare you the details. Let’s just note that what really stood out from a 30,000-foot perspective was the revenue chalked up by all three. 

Big-Tech Revenue Exceeding Pre-Covid Levels

A 69% increase in GOOGL ad revenue was pretty impressive, with YouTube driving a bunch of that. AAPL’s iPhone revenue of nearly $40 billion came in near the very top-end of the range of analyst estimates and probably tells you demand is a bit more robust than maybe Wall Street had thought going in. 

MSFT’s overall revenue was about $2 billion above the average Wall Street estimate, with sales of its Azure cloud platform rising 51% to outpace the growth seen in the last two quarters. That’s quite a feat considering how fast Azure was already growing. MSFT seems like it’s trying to defeat the law of large numbers. GOOGL’s cloud revenue, which doesn’t face the challenge of MSFT’s more established platform when it comes to that old law, rose an even faster 54%. 

One minor demerit worth mentioning for MSFT might have been that Azure cloud growth decelerated on a constant-currency basis. Investors still want them to gain ground on Amazon’s AMZN Amazon Web Services (AWS). 

You could argue that some of the sparkling revenue growth we saw across the big three yesterday reflected easy comparisons to a year ago when the economy was tangled in the Covid thicket much more than it is today. That’s certainly something that helps explain overall earnings growth in Tech and beyond, considering the expenses so many companies had to wrestle with back then and the lockdown of the world economy. 

Revenue growth, however, is impressive even with the comparisons. MSFT’s revenue was the highest ever for any quarter, which means better than anything it ever managed in the pre-Covid era. AAPL’s revenue of $81.4 billion compared with revenue of $53.8 billion in the same quarter two years ago, a sign that business has expanded massively over the course of the pandemic. 

So considering all that, why are shares not moving higher for all three? Perhaps it’s a reflection of valuations, which have been climbing along with customer and advertiser demand for the companies’ products. Shares of AAPL, for instance, recently hit all-time highs and trade at a price-to-earnings valuation well above 30, according to third-party analyst earnings estimates. The good news, you might say, has been largely built-in. MSFT and GOOGL also trade at relatively high valuations compared with their historic performance. 

That doesn’t mean they can’t necessarily go up from here, but perhaps some investors are worried that we’re near the peak of the post-Covid earnings cycle and growth could slow from this point. That’s the general impression from analysts for the market as a whole, with average estimates pointing toward the biggest earnings growth happening in 2021, followed by a slowdown next year. 

That’s why the selling in pre-market trading, especially of AAPL, could reflect some profit-taking and maybe even a little investor fatigue. It’s been a good run, but you could argue that there was no earnings number AAPL could have reported that would have had a different impact on the stock in the immediate aftermath. It’s also possible investors were slightly disappointed that in its conference call, AAPL said services growth “could return to a more typical level” and that overall revenue growth could slow. 

Up Ahead: Facebook And Face-to-Face With Fed’s Powell

We’re only part of the way through this massive flow of earnings, as Facebook FB comes later today and Amazon (AMZN) wraps up the “FAANG” components tomorrow afternoon.  

After strong ad revenue from GOOGL yesterday, FB’s ad revenue comes into focus when it reports. In Q1, FB said ad revenue grew 30% over Q1 of 2020. On the April earnings call, FB said it expected Q2 total revenue growth to remain stable or modestly accelerate relative to Q1. 

Before FB reports, the Fed is scheduled to finish its two-day meeting and put out a statement on the economy. With all the inflation concerns hovering around the market, anything the Fed statement touches on related to pricing might be market-moving. There’s also Powell’s press conference after the 2 p.m. ET Fed announcement, and it’s almost certain he’ll be asked if inflation still appears to be a “transitory” item, to use his own words. If Powell sounds at all hawkish—which would be a major deviation from his testimony to Congress earlier this month—that might weigh on stocks, and perhaps give Treasury yields a lift 

There have been some signs of slowing in the economy, with the housing market especially starting to calm a bit and some commodity prices trending somewhat lower. Used car prices—another major driver of recent inflation—seem to be coming down, too. Few if any on Wall Street expect any major policy announcements from the Fed today. 

Stocks fell moderately to sharply on Tuesday ahead of all the earnings and Fed madness, with the tech-heavy Nasdaq 100 (NDX) and the Russell 2000 (RUT) small-cap index taking the heaviest losses. Volatility jumped for the second straight day, and fixed income continued to draw investors. The 10-year Treasury yield fell below 1.25%., with some analysts seeing 1.2% as a key technical support area. 

When you see this kind of action, it’s a good sign that caution is in the air. Some of this might be due to the Delta variant of Covid and new worries about possible government action to stop the spread. There’s also China’s continued crackdown on companies there to consider. A lot of stuff is in the mix, meaning investors might want to see how things sort out over the next few days before making any major commitments one way or another.

CHART OF THE DAY: CHOPPING WOOD. Lumber futures (/LB—candlestick) have fallen dramatically this summer after setting all-time highs in the spring. But copper futures (/HG—purple line) are holding their own, down from peaks but still up sharply for the year. Commodities markets often can be a useful barometer of economic demand around the world. Data Source: CME Group. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

Get Ready: One of the most important data points comes out before the market open tomorrow when investors get a glance at the government’s first estimate for Q2 gross domestic product. When economists want to analyze whether the economy’s expanding or slipping into a recession, the first place they often turn to is the GDP report. If you wonder why GDP is important or why people care, it’s because the data truly show productivity of the country and whether our economy is growing or sinking. That can help you to set long-term prospects for the equities or indices you invest in.

Looking ahead to the data, the Wall Street analyst consensus is for Q2 GDP growth of a truly amazing 8.5%, according to research firm Briefing.com. This would eclipse the 6.4% Q1 growth and be the best quarterly pace in decades. However, it does reflect an easy comparison to some of the worst growth in decades in the year-ago quarter during the first wave of Covid, so take it with a grain of salt. If it’s in the realm of expectations, it may not have that much market impact. A miss, however, might have people start worrying that growth may have peaked. With inflation in the market’s microscope, keep an eye on one subunit in the report, the GDP price index. It rose to 4.3% in Q1 from 2% in Q4 of 2020. 

Efforts Rewarded: Until TSLA shares stumbled with the rest of Tech on Tuesday after beating Wall Street’s consensus for earnings, it’s generally been a better start to earnings season’s “awards show” this quarter than during Q1 earnings. By that, we mean stocks that exceed analysts’ estimates are performing better in the market immediately afterward than last time. But stocks that miss estimates are still losing plenty of ground. It became a bit of a running joke last earnings season to say, “So and so beat on earnings, let’s see how much their stock is down.” One school of thought then was that stocks had already built in most of the good news and investors used earnings to take profit. That’s not the case so much this time, so maybe investors are starting to reward companies a bit more for coming in strong. We’ll see if it lasts, especially now that we’re in the heart of Tech earnings and the sector’s been on such a run lately. That means just beating earnings estimates may not be enough. Investors tend to want strong guidance, too. 

Lesson Learned? Yesterday you may remember learning a little lesson here about how rising volatility can bite the stock market. Consider Tuesday another possible example. The Cboe Volatility Index (VIX) flirted with 20 in the morning after a decent rise Monday, and stocks appeared to pay heed. All of the major indices turned lower. You can’t pin all the blame on volatility, considering Tech is under pressure from Tech weakness in China. Having said that, VIX evidently provided some clues the day before that nerves might have been fraying. This isn’t necessarily telling you to trade based on VIX alone, because there are far too many other factors influencing prices. However, if you’re considering a major trade, it arguably wouldn’t hurt to check which way the volatility flag is flying before a final “no or no-go” decision. In a sense, rising VIX can be like a flashing yellow as you approach a trading intersection.

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

Image by Free-Photos from Pixabay

The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.