NEW YORK, July 23 (Reuters) – The Wall Street rally faces a new test next week with a flood of earnings reports from major U.S. companies, including tech and internet giants that have recently regained market leadership.
More than a third of the S&P 500 is expected to release quarterly results next week, with headlining Apple (AAPL.O), Microsoft (MSFT.O), Amazon (AMZN.O) and Google Parent Alphabet (GOOGL .O), the four largest American companies by market value.
These stocks have gained between 5 and 7% so far this month, at Thursday’s close, while the S&P 500 (.SPX) has only climbed 1.6%. The S&P 500 Equal Weight Index (.SPXEW), a barometer of the average stock, fell 0.2%.
“The level of expectation for these names is a bit higher than it was a month ago given the performance of the stocks, so I think they’re going to have to deliver,” said Walter Todd, director of investments at Greenwood Capital in South Carolina.
“It’s about looking to the future: can they live up to the expectations reflected in stock prices?”
The strength of these large stocks came from concerns about the slowing economic recovery in the United States which helped push benchmark Treasury yields down this week to their lowest levels since February, before rebounding.
As the Delta variant of COVID-19 sweeps across the United States, the economic outlook will be the focus of the Federal Reserve meeting on Tuesday and Wednesday, another crucial event for investors looking for clues as to when the central bank could curb its easy money strategies.
Although the S&P 500 sits at record highs after rising more than 95% from its March 2020 lows, stocks have experienced greater volatility in recent days as investors seek to reconcile market signals. bond regarding the economic outlook.
Indeed, below the surface, stock performance indicates doubts about economic strength. Growth stocks, which dominated the market for years as the economy grew slowly, outperformed economically sensitive value stocks in July, while smaller stocks, which tend to be more exposed to the US economy, have also fallen behind, with the small 2000 (.RUT) down more than 4% so far this month.
“Investors have … sought safety in these megacaps, especially the megacap technology companies, which are expected to continue to experience very strong growth,” said Tim Skiendzielewski, chief investment officer at Aberdeen Standard Investments in Philadelphia.
The dominance of mega-capitalized stocks also raises concerns that the larger index may be more dependent on the fortunes of a few giant tech-related companies.
The market capitalization of five companies – Apple, Microsoft, Amazon, Alphabet and Facebook (FB.O) – was recently 24.6% of the S&P 500 market cap, almost the highest proportion it has ever had. summer in 2021.
Less than half of S&P 500 stocks recently traded above their 50-day moving averages even as the index hit or near new highs, up from over 90% in April, a sign that “this what’s going on below the surface contradicts the image of strength that is portrayed if you just look at popular averages, ”said Willie Delwiche, investment strategist at market research firm All Star Charts.
At the same time, bullish investors can point to a good start to an earnings season that is expected to show a strong rebound from the pandemic. With 120 S&P 500 companies reporting so far, second quarter profits are expected to have jumped 78.1% from a year ago, from 65.4% at the start of the month, according to data from Refinitiv IBES.
Other heavyweights reported next week include Facebook (FB.O), Tesla (TSLA.O), Visa (VN), Exxon Mobil (XOM.N) and Pfizer (PFE.N). With concerns about the strength of the economy, investors will focus on business expectations for the remainder of the year and into 2022.
“We may not see many quarters of 70% earnings growth going forward, but that still doesn’t mean we are looking at negative earnings growth,” said Anu Gaggar, Global Investment Strategist at Commonwealth Financial Network. always reflects a healthy economic environment.
Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Nick Zieminski
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