Microsoft, Google, Meta and Amazon reported Q1 earnings last week. All of them beat earnings expectations. The Street absolutely loved the hype around AI and voted Microsoft as the winner against Google in the AI dog fight. Some even said that Microsoft has had an iPhone moment in AI, meaning AI will be the new growth driver for Microsoft as if Microsoft has figured out how to make money with AI already.
Apple will report this coming week after the Fed meeting.
The better than expected earnings just showed that the mega techs can perform in the most challenging economical conditions. They all have pristine balance sheets. Never have to worry about funding like the rest of the world.
Contrary to the mega tech companies, the banking sector will always have to worry about next blow up due to the nature of leverage in lending. There is no innovation in banking business, except incremental improvements in efficiency. First Republic Bank reported earnings last Monday and it ignited the dumpster fire in regional banks again. Tomorrow we shall find out First Republic Bank’s fate. FDIC will take receivership of the bank and the good part of the bank will be sold. Another bank went under!
It really doesn’t pay to buy the very cheap banking stocks such as JPMorgan Chase or Bank of America. The entire banking sector will be heavily regulated and eventually they will all be like utility companies. It also doesn’t pay to venture out to buy small cap or mid cap stocks as they have less resources and will be impacted by macro conditions more than the very safe mega cap techs.
Amazon confessed in earnings conference call that the cloud business has been impacted by the macro conditions. The stock immediately reversed the initial jump and turned negative.
The major theme of the mega tech earnings calls was a slowing and cautious enterprise spending environment. The mega techs beat earnings expectations, but the absolute earnings were not that great.
The Russell 2000 small cap and growth stocks are not participating in the rally. This divergence is troubling for the general market. Perhaps the general market will need a shock from the Fed to come back to life. In other words, the mega techs can perform at whatever interest rates, but the rest of the world relies on the Fed’s mercy. The good earnings from mega cap techs are not enough for bring up the rest of the world.
So if the Fed doesn’t pause or issue some very definitive statements about where rates will be this coming Wednesday, the market probably will continue to be in limbo. No hard crash (because some parts of the market are doing well), no hard rally either (major uncertainty about the interest rates).
Below is the NASDAQ weekly chart. It has been six weeks since the March low. With all the good mega tech earnings and price momentum, the NASDAQ was not able to take out early February high because it has been weighed down by the concerns with the macro conditions. Next Wednesday the market will have to contend with the Fed decision.
In our experience, when the market has been range bound in the last 5-6 weeks with narrowing breadth, the next move probably is on the downside. So our guess is that the market probably will selloff in the coming week.
Apple’s earnings call probably will be the catalyst to lead the market down after the Fed meeting.
We are stepping into the coming week with caution even though the daily chart looks as bullish as it can get.
The daily cycle is confirmed on 4/25/23. Now it is 3 days into the daily cycle. The 4/18/23 high should be taken out soon. But the narrowing breadth is one of the major reasons why we are cautious.