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Most stocks had a normal pullback to their 20-day moving average in the middle of last week. The dip was bought again and most finished near the highs of their weekly range. The bulls are still in control. Two factors might derail the current rally:
- A large number of worse-than-expected earnings. Many companies have already guided lower several times in the past six months or so. It will take a really big earnings miss like the one Goldman Sachs had, to see lower prices. For the most part, the market is in the mood to look for the silver lining this earnings season, at least when comes to tech stocks. Just look at the reaction to Netflix’s earnings. They missed earnings by a mile and yet their stock went higher. The market decided to pay attention to a subscriber’s growth, which makes sense because it is a reflection of potential future earnings growth. As we all know, the market is forward-looking.
- Most major central banks around the world are likely to continue to tighten monetary conditions, especially the ECB and the Fed. They are certainly the biggest wall of worry to climb.
In the meantime, it seems the stock of every company that announced layoffs is going up. Wall Street is sending a clear message: cut costs and improve efficiency to prepare for a potential recession. Seeing the positive market reaction, more CEOs are likely to follow the same example. Even if a recession doesn’t materialize, the companies will emerge stronger. This is why the market is reacting favorably – GOOGL, MSFT CRM, AMZN, COIN.
The real earnings season starts next week with hundreds of companies reporting. Some of the more interesting reports include TSLA, MSFT, V, MA, ASML, TXN, IBM, ISRG, etc.
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