Stocks jumped higher this morning, rebounding after yesterday’s major loss. Tech led the way while value shares followed.
Much of the market’s enthusiasm at the open was driven by Microsoft’s (NASDAQ: MSFT) earnings, revealed last evening. The Big Tech firm beat estimates and, most importantly, provided positive forward guidance. This offset Alphabet’s (NASDAQ: GOOG) big miss, which caused GOOG shares to fall over 2% through noon.
“We’re trying to find a place of stability,” said Kari Firestone, chairman and CEO of Aureus Asset Management.
“We need to see a few more names come in with really strong, reliable, and sustainable earnings so investors can get back on board.”
Microsoft certainly did its job in that regard. The question now is whether Amazon (NASDAQ: AMZN), Facebook-parent Meta (NASDAQ: FB), and Apple (NASDAQ: AAPL) can follow suit over the next few days.
Analysts were concerned last month that the market’s top stocks – all growth companies – wouldn’t be able to handle rising rates. That anxiety only grew stronger as Big Tech earnings approached.
“The wall of worry has been building, as it relates to Fed worries,” said Matt Stucky, Northwestern Mutual Wealth Management senior portfolio manager.
“Just a little over three months ago, the futures market was pricing in just three or four interest rate hikes for all of 2022. We’re quite a bit above that now. And markets are pricing in a federal funds policy rate at about 2.7% by year-end. So that’s a significant amount of ratcheting up of Fed tightening that’s been building up throughout the year. And it’s one of the major reasons why we’ve seen volatility kick up as well.”
Last night’s Microsoft earnings had many traders willing to buy the dip this morning, as evidenced by a surge across all three major indexes. But strategists are warning investors that there may be more selling to go before the market hits bottom. It’s good advice; rapid rallies (like today’s and last Monday’s) are common in deeper selloffs.
And they’re often followed by bigger retracements to new lows.
“There are some names deeply discounted but I do think there’s a little bit more to go on the discounts. So I would be cautious about entering the markets at this point,” explained Kathy Entwistle, Morgan Stanley Private Wealth Management managing director.
“It’s impossible to call the bottom, so we do like to do a little bit of dollar-cost averaging on the way in as well. Supply chain has been an issue, we’ve had issues over in China, we’ve got inflation — these are all things we’ve known about and have been recurring. But I think it’s all coming to a head right now and everybody’s at this point where it’s like there’s nowhere else to go. We know that [Fed] action is finally going to happen and that’s going to affect the markets.”
The moral of the story here is that traders need to remain cautious despite Microsoft’s major “beat” last evening.
Investors that bought the dip on Monday got burned just one day later when stocks plummeted. A similar situation may be developing this morning.
Keep in mind that there’s only 1.6% to go before the S&P hits the 2022 low, too. If support fails at that price level, we’ll more than likely see a bear market emerge shortly thereafter, leaving many bulls who bought the dip today feeling a little foolish.
On the other hand, a “rip your face off” rally could just as easily ensue if the other Big Tech firms provide optimistic forward guidance in the coming days.
