Good Earnings Are Already Being Sold. Will the Mag 7 Reports Be Next?

Investors grew slightly nervous on the eve of earnings news from five of the Magnificent Seven stocks. The losses in the indexes were mild, but quite a few technology stocks took hits, and some good earnings reports were sold. It didn't help matters that there were headlines about OpenAI missing targets for both new users and revenue.

The Spring Setup

Earlier this year the Mag 7 stocks all suffered selling pressure on their fourth-quarter earnings results due to concerns about the level of capital spending and the return on those massive capital investments. The group recovered very nicely after bottoming on March 30, but that was driven in large part by hopes that the Iran situation was on the brink of being settled.

Sentiment about AI has improved and there is some shifting in the leadership names, however, the question of capital spending and returns is still out there and is likely to be an issue when we see some of these reports on Wednesday night.

Good News Already Being Sold

The pattern is already showing up this earnings season. Last Wednesday, IBM (IBM) beat on the top and bottom lines, and the stock fell more than 8% because the company merely maintained full-year guidance rather than raising it. ServiceNow (NOW) beat across every metric the same day and fell roughly 17%. The week before, GE Aerospace (GE) , Northrop Grumman (NOC) , and RTX (RTX) all beat estimates and all sold off because they did not raise guidance. Honeywell (HON) beat on earnings and fell on softer second-quarter guidance.

The pattern was on display again on Tuesday. Spotify (SPOT) beat first-quarter earnings estimates by nearly 17%, but the stock fell roughly 14% in its worst single-session decline in over four years on softer second-quarter guidance.

United Parcel Service (UPS) beat on the top and bottom lines but fell more than 4% because it merely maintained rather than raised full-year guidance. The contrast was Coca-Cola (KO) , which beat and raised its full-year outlook and was rewarded with a gain of close to 6%, but was still well off its intraday highs.

The common thread is that a beat was already priced in. When the bar is set too high and maintained, an outlook reads as a downgrade, and any softness becomes the story. That is the setup heading into Wednesday night.

Game Plan

As I discussed earlier, I've made some moves to reduce my risk exposure in front of earnings news. I'm not anticipating a major turn but I do expect a bumpy ride and want increased flexibility to deal with it.

Conditions for selling the good news of a revenue and earnings beat are quite high and I expect that we will see some investors use strength to cut back exposure. Technical conditions suggest we need a rest and that can happen without a major downside reversal.

One thing I preach quite often is to focus on keeping your accounts as close to highs as possible. If you do that you avoid the unproductive work of making up losses and can better enjoy the power of compounding. Keeping account drawdowns small is one of the toughest things to do in trading but if you can do it, then the chances of substantial outperformance are much greater.

Have a good evening. I'll see you Wednesday.

At the time of publication, Rev Shark had no positions in any securities mentioned.