Wednesday's Market Minute: Wild Wednesday

Big Tech Must Rally Now

Oh, it’s already rallied, you say. [Insert Kylo Ren gif] MORE! It doesn’t matter how much FANG is up on the year, how far the Nasdaq’s gone, or how overbought or overvalued it looks. Apple AAPL, Alphabet GOOG, and Microsoft MSFT just posted such insanely huge earnings that there is absolutely no reason for them to sell off unless it is the summit peak ahead of a mountainous decline. Alphabet’s revenue was beaten by $5 billion, Microsoft by $2 billion, and Apple cleared the bar by $7.5 billion. These companies are everything investors dreamed they would be and more, partly due to accelerated demand for their products and services due to the pandemic period.

That’s why it’s so important to see the market satisfied by these results: because it looks like annual growth at these companies will never be better. Apple is the key company to watch here because, despite this quarter’s enormous beat, the 36% growth rate for the topline did decline from last quarter’s blistering 54% pace. Microsoft and Alphabet both saw faster growth, but analysts expect those rates to drop substantially next quarter. With the generous amount of buybacks and dividends these companies offer, there’s plenty of reason to believe investors could look past peak growth rates. But we don’t know. After a year and a half of chasing growth in any form, it’s possible these FANG giants could trade more like a speculative secular growth stock than a blue-chip.

Just look at Netflix NFLX as an example – the stock has been range-bound for a year after its subscriber and revenue growth rate peaked in early 2020. Cloud companies that posted scorching-hot growth rates last year have also been struggling to make new highs. If FANG goes this route, and this incredible quarter turns into a profit-taking opportunity, it could be a very sustained one.

Jay Powell And The Hawks

In all of this, one can’t lose sight of the fact the sharpest macro shifts of the year all happened around the June FOMC. Extreme yield-curve compression and a surprise ascent in the dollar began the day the Fed took a marginal step towards hawkishness last month by embracing the hawks through an acceleration of the dot-plot’s expected tightening timeline. While we know Chair Powell is not eager to change the game plan until employment satisfies his requirements, the needle is getting harder to thread. Overall data has been missing expectations, with the economic surprise rate in steady decline since the last FOMC.

Yet, the inflation surprise rate is ripping higher. I looked at the history between the two indexes – economic surprise vs. inflation surprise – and they’ve never been this inversely correlated while the inflation beat-rate is climbing this way. And don’t forget the last CPI went in the wrong direction – higher when analysts expected lower – the literal opposite of transitory. If this forces the Fed more hawkish, watch for deeper yield-curve compression and a higher dollar. If Powell uses this opportunity to call back the AIT framework from the beginning of the year, watch out for bonds – with inflation already at 5%, a message from Powell that he’s not even thinking about hiking could be the force for yields to blast off again.