Microsoft Earnings Are Key, But Here's Why a Disappointment May Be a Positive
It will take a very strong results and great guidance for the Magnificent Seven stock to regain its momentum.
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The most important earnings report of the quarter will be Microsoft MSFT, which reports after the close on Tuesday night. It has been the leading AI stock outside of the semiconductor sector and will address the issue of how quickly investment in AI will start producing substantial revenue.
Alphabet GOOGL stock reacted poorly to its earnings report when management noted that massive investment would be required for years before significant new revenue would be recognized. So far, the only stocks that have really benefited from AI are those that create the necessary infrastructure. Nvidia NVDA has been the leader in providing the tools that are needed to develop AI, but it has lost momentum and is now trading under its 50-day simple moving average.
Microsoft is about 9% off the highs it hit in early July, and expectations have been lowered, but it still trades at an aggressive multiple with a trailing P/E of about 37 and expected EPS growth for the quarter of 9% over last year. It is going to take a very strong report and great guidance for Microsoft to regain its momentum and test its highs.
There are three other Magnificent Seven names reporting this week that have similar issues, but two other events will also impact the market. The first is the FOMC interest-rate decision on Wednesday. The market is anticipating that Fed Chair Jerome Powell and his crew will set the stage for rate cuts in September. While there are some economists calling for a cut right away, that is highly unlikely. The market will be looking for insight into the Fed’s level of confidence that inflation is now sufficiently tame to allow for cuts.
Suppose the market has increased confidence about rate cuts that should help to create more rotation into small stocks and the broader market. Even if the Magnificent Seven name loses further momentum, it may actually be beneficial as it could help intensify the rotational action. The potential for rate cuts will give the bulls a tailwind.
Microsoft’s report will be very important, but even if it disappoints, it may not be a negative for the rest of the market.
My game plan is to focus on the smaller stocks with the best charts and price action. Many will have earnings soon, which will create additional volatility to trade.
At the time of publication, Rev Shark had no positions in any securities mentioned.
