over 3 years ago • 3 mins
Investors have been relying on big US tech companies to keep the stock market rally going, and the Facebooks and Apples of the world were up to the challenge last week, beating quarterly expectations.
No matter what’s going on in the world, you can bet big US tech companies will be front and center of most investors’ minds. And in a month where the CEOs of Alphabet, Facebook, Amazon, and Apple were interrogated by the US government over antitrust concerns, even that’s an understatement. The four firms – and Microsoft – are now systemically important because big tech stocks represent about a quarter of the US stock market. And since the major selloff in March, they’ve been largely responsible for its recovery too. In fact, if you didn’t include them at all, the S&P 500 would’ve fallen last quarter, rather than climbing 21%.
That’s led some analysts to conclude tech stocks have risen too far, too fast. For one, they argue the companies’ rise has overlooked the increased regulatory risk they’re now facing – one that’ll become all the more prominent if Democrats win big in November’s US elections. And for another, they reckon share prices have drifted further away from the companies’ potential for earnings growth. That’s a phenomenon that usually happens when retail investors, say, buy into bankrupt companies, but it’s not like it hasn’t happened to the pros too…
Early quarterly reports from tech companies were mixed: Netflix and Microsoft reported stronger-than-expected quarterly earnings but weaker-than-expected future forecasts, causing some analysts to worry the stock market party was over. But then came Apple, Alphabet, Amazon, and Facebook late on Thursday to keep it going long into the night: all four beat expectations despite boycotts, store closures, and a slowdown in advertising spending. And in Amazon’s case, its revenue forecast for this quarter was beyond what investors had been hoping for.
Companies in the US tell investors how they’ve done and what to expect on a quarterly basis, but investors in the UK and parts of Europe only get that level of detail twice a year. Superstar investor Warren Buffett and the CEO of JPMorgan Chase previously called for US companies to become more European in that regard: they think the American approach results in too much focus on short-term objectives at the expense of long-term growth and business sustainability. On the flip side, some investors worry fewer updates would just fuel a reliance on rumors instead.
Some traders think earnings updates are the perfect time to risk betting on individual stocks, but that’s not true most of the time. The “efficient market hypothesis” suggests a share price already reflects the average of what investors know about a company, and that any price movement – after earnings, for instance – is driven by random, previously unknown information. A long-term investor, by contrast, will assess an earnings update in the context of their previous analysis, in an effort to determine whether a stock is worth more or less than they previously thought.
Data out last week showed the US economy shrank by an annualized 33% last quarter – its biggest decline on record, hot on the heels of an economic contraction in the first quarter. The shrinkage of the world’s largest economy for two quarters in a row means it is now officially – and as expected – in a recession.
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