The Big Question as an Important Earnings Week Arrives
Tech leaders face a key test, but has the ‘equation’ been reset? Plus, two China headlines to know about and my game plan for the week.
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Following severe volatility in chip and technology stocks last week, we are entering the heart of earnings season.
The big question is whether the recent carnage has changed expectations enough to change the response to the numbers. Will in-line reports be good enough, or does the sell-the-news dynamic that has been punishing some strong results remain in charge?
The market is set for a quiet open, with futures modestly higher as everyone waits for the reports.
The Evidence on Expectations
Recent evidence suggests sell-the-news has been an ongoing dynamic. Micron (MU) is down around 30% after a blowout report with spectacular guidance. Taiwan Semiconductor (TSM) beat on its quarter last week, but the stock was sold and took the whole chip group down with it after the company raised its capex guidance to $60 billion to $64 billion from the prior $52 billion to $56 billion range. Even good numbers get sold when the capex figure feeds the spending worry. IBM (IBM) was punished on its pre-announcement, and Netflix (NFLX) was hit hard on results that were not far from expectations.
So far this earnings season, more than 86% of the S&P 500 companies that have reported have beaten expectations, and the market has sold plenty of them anyway. Beats are not the primary issue. Guidance and capex are.
The question is whether last week’s selling reset the equation. Intel (INTC) will be a major test case. The stock is down 33% for the month heading into its report on Thursday, and Susquehanna just raised its price target to $115 from $80 anyway, expecting server demand to offset memory-driven PC weakness.
There are similar setups across much of the technology sector. Crushed stocks, analysts still constructive, and expectations that have been reset. If a beaten-down name like Intel can rally on a decent report, the correction has done its job. If it gets sold anyway, the dynamic has not changed and we have cause for concern.
The Big Reports Hit Wednesday
The answer starts arriving Wednesday after the close when Alphabet (GOOGL), Tesla (TSLA), IBM, ServiceNow (NOW), and Texas Instruments (TXN) all report. Intel follows Thursday. Alphabet is particularly interesting because it comes in with the Gemini delay overhang and lowered expectations after recent weakness.
Capex and margins will be the focus in every report. Will there be any pullback in AI spending, and are profit margins holding up? Those two questions matter more than the headline numbers.
China News Adds a New Wrinkle
Two China headlines are hitting Monday morning. China is accelerating efforts to stop its severe equity selloff, deploying two major state funds to buy domestic equities and stabilize its capital markets, per Bloomberg. The intense selling that started in the Korean chip names has been spilling across Asian markets, and Beijing stepping in with state buying shows how serious the pressure has become.
The second item is that the Trump administration could ban Chinese AI models, according to Axios. That would be another escalation in the technology conflict between the two countries and adds one more uncertainty for the AI trade just as earnings hit. The chip and AI names have enough problems without a new front in the tech war.
The Inflation Issue Is Not Going Away
The Iran situation appears to be intensifying again, oil is higher again, and bonds are down with rates moving up. The inflation pressure that drove the ugly action two weeks ago is still building underneath the earnings story.
If the reports disappoint and rates keep rising at the same time, there is no cushion.
My Strategy
My game plan has not changed. High cash levels and patience while I track a long list of names into their reports. Some I will look to play in front of the numbers, and others I will focus on trading after the news hits. The volatility around these reports should produce some good entries in quality names, and that is what I am waiting for. I’m not interested in building longer-term positions right now due to the chaotic market conditions.
The reaction to Wednesday’s reports will tell us more about this market than anything that happens Monday or Tuesday. I am content to watch the early-week action and keep my focus on the setups that are developing.
At the time of publication, Rev Shark had no positions in any securities mentioned.
