Earnings season is in full swing. So far, it’s been more than good enough, and there are even more earnings reports to watch this week.
Broad markets are reaching new all-time highs. The S&P 500 already has gained more than 6% so far this year, as the “melt-up” in the market continues.
If earnings so far are any clue, those gains aren’t coming to an end any time soon.
As I wrote a week ago, this is a particularly key stretch for the market. With Treasury yields rising and tax reform in the books, external catalysts for US stocks, in particular, are somewhat limited. Higher valuations only can come from higher earnings. and so far, most companies have delivered on that front.
This week offers another test — notably for large-cap tech. Four of the five so-called ‘FAANG’ stocks report. After Netflix, Inc. (NASDAQ:NFLX) posted a blowout quarter last week, expectations are rising. So the three earnings reports to watch for this week are all tech giants.
These companies will have an opportunity to try and keep pace with earnings so far — but any stumbles could bleed over into what is starting to look like an overbought market.
Earnings Reports to Watch #1: Facebook (FB)
Earnings Report Date: January 31, after market close
Somewhat quietly, Facebook Inc (NASDAQ:FB) has underperformed of late. FB stock has gained just 4% since November 1st, lagging peers and the NASDAQ 100.
There are reasons for concern, and this looks like a good spot to take profits ahead of earnings.
FB quickly shook off CEO Mark Zuckerberg’s announcement earlier this month that the company would focus on engagement over earnings. But that strategic decision likely will come back to the fore during Wednesday afternoon’s conference call — and could overshadow even strong numbers in the quarter.
Wall Street still is on board, with the average price target of $212 suggesting 13% upside.
But choppy trading of late means Facebook likely needs a catalyst in its fourth-quarter report to reach new highs. With the legacy platform potentially seeing a bumpy 2018 and ancillary efforts like WhatsApp and Instagram still driving little in the way of revenue, that catalyst will be tough to find. And more investors may see the report as a reason to cash in.
Earnings Reports to Watch: Amazon
Earnings Report Date: February 1, after market close
There will be no better signal as to market sentiment this earnings season than the Q4 report from Amazon.com, Inc. (NASDAQ:AMZN).
Somewhat incredibly, AMZN stock has gained 41% just since the day before its Q3 release in late October. The stock has added $190 billion in value over that period — an amount equal to the entire market capitalization of Anheuser Busch InBev NV (ADR) (NYSE:BUD).
AMZN stock has made those gains despite the fact that by most traditional metrics, the stock has a nearly unsupportable valuation. It’s run so fast that it’s even outpaced the long-bullish Street. AMZN actually trades more than 3% above the average analyst target price.
To many investors, AMZN’s huge gains and its 170x forward P/E ratio make it the poster child for an overbought market. And so its Q4 report on Thursday afternoon becomes a major test. If holiday numbers impress, can investors still find upside in the stock? Or is there a point where valuation concerns start to come into play?
After Amazon’s big pop following Q3 earnings and the huge jump in NFLX over the past few sessions, AMZN’s rally could have more juice. But if investors start to get uncomfortable with the price here, those worries could manifest elsewhere in the market.
Earnings Reports to Watch: Apple
Just a few sessions ago, Apple Inc. (NASDAQ:AAPL) looked well on its way to becoming the first company valued at over a trillion dollars.
But analysts have taken aim at Apple stock this week, with both JPMorgan Chase & Co. (NYSE:JPM) and Bernstein predicting a big step-down in iPhone X demand. AAPL now has dipped below its 20- and 50-day moving averages. Technically speaking, the decline could last until support is re-established around $155 — about 10% below current prices.
Apple needs a good earnings report to avoid that outcome. As successful as the company has been elsewhere, it’s still the iPhone that drives the majority of revenue and profits. With the X in the rearview mirror, the long-running fears ‘cannibalization’ can return on Thursday — particularly if unit guidance for the company’s fiscal second-quarter disappoints.
As impressive as Apple stock has performed over the years, it has taken some reasonably big dives. Particularly after major iPhone releases, long-term concerns replace what consistently looks like a ‘cheap’ multiple.
If Apple can’t inspire confidence this week, another such dip may be on the way. And the chart suggests the dip could come relatively quickly.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.