Earnings Season Blasts Off Tonight: Here Is What to Watch
With the indexes hovering close to highs and a barrage of earnings, economic, and political news about to hit, the bears are predicting that the end is near. The question, of course, is whether the news flow will be the catalyst to kill the market and trigger a reversal in trend.
Maybe, but there is a tendency for extended markets to become even more extended when the bears start yapping about how illogical and crazy the action has become. Markets like this don't tend to suddenly collapse unless there is some major news that is not already anticipated.
The most immediate threat to the market is that there will be a sell-the-news reaction to earnings reports from the Magnificent Seven names that spills over and impacts the entire market. The earnings report from Alphabet/Google (GOOGL) will be the first test after the close on Tuesday.
Three months ago, Google's second-quarter earnings report triggered a sharp drop in the stock that lasted for two months. The primary reason the stock sold off was that management indicated that the cost of AI was higher than anticipated, and the payoff would take longer than expected. Google had to make substantially higher AI investments than the analysts had predicted.
During the second quarter, other major names such as Microsoft (MSFT) also discussed how AI investment was much higher than expected and that the payoff would take years. That caused the Mag 7 names to turn into laggards for much of the last three months. The primary exception was Nvidia (NVDA) , which provides much of the infrastructure that companies like Google and Microsoft have to buy.
The big question that Google will address Tuesday evening is whether its infrastructure spending will continue at high levels and when the investment will produce bottom-line results. The words "artificial intelligence" are no longer a magic formula that will automatically send stocks higher.
The Google report tonight should provide some insight into how the earnings season will progress.
The other big issue I will be watching is whether the strong rotation into the Russell 2000 (IWM) will continue. The Russell jumped 1.6% on Monday, while the Nasdaq 100 (QQQ) was dead flat. There was a surge in speculative trading, but the problem is that those surges have had a tendency to reverse quite quickly this year. The IWM has had about five strong runs since June but pulled back sharply each time before regrouping and trying again. We still have to wait for small-cap earnings season to begin but will watch for signs of faltering momentum.
We have a mild start on Tuesday with Consumer Confidence and JOLTS Job Openings news due out at 10 a.m. ET.
At the time of publication, Rev Shark was long NVDA.