Markets were bifurcated yesterday as both TSLA and NFLX profit reports were disappointing. The NASDAQ dropped about 2.3% and the Dow was up about 0.5%. Markets were also spooked by rising interest rates.
As widely noted, the vast majority of the year-to-date advance is focused in the seven mega sized technology companies, an advance predicated upon falling interest rates and rising profits. However, neither of the two tenants are materializing.
Volumes have been written about monetary policy where the overnight is expected to be raised again next week. Yesterday’s economic data supported the possibility of two more rate increases by year’s end.
Bloomberg writes profits for the tech companies in the S & P 500 are projected to decline 5% in the quarter, returning to profit growth in the final quarter of the year.
And then there are valuations and price targets which are extremely stretched.
For example, according to Bloomberg, MSFT has been above the average target price since 2020, though Wednesday the premium hit its highest since 2013. Much of the 2023 rally reflects excitement over AI.
Any disappointments in results or forward-looking statements could result in rising volatility. As noted, TSLA—one of the seven companies that have boosted the NASDAQ 100 by 43% YTD—missed sending shares lower by 9.8%. NFLX—albeit not one of the famed seven—also missed and shares cascaded 8.5% lower.
Next week MSFT, AMZN and GOOG all post results. If any of these companies miss, volatility may further rise.
Also weighing on the markets is talks of a worsening of the conflict in Ukraine, which may result in higher oil and food prices, which could further increase inflationary pressures.
What will happen today? Not only is today options expiration day where $2.4 trillion of options tied to stocks and indexes are scheduled to mature, it is also the day of an out of cycle rebalance in the NASDAQ 100.
As noted two weeks ago, NASDAQ is rebalancing the NASDAQ 100 to lower the weighting of the six largest companies in this benchmark from a recent peak of 54.1% to 40% of total capitalization. The six companies are MSFT, AAPL, GOOG, NVDA, AMZN and TSLA.
Will this rebalancing or option expiration day be a factor?
Last night the foreign markets were mixed. London was up 0.09%, Paris up 0.29% and Frankfurt down 0.41%. China was down 0.06%, Japan down 0.57% and Hang Seng up 0.78%. Dow and NASDAQ futures are flat and up 0.3%, respectively. The 10-year is up 4/32 to yield 3.84%.
