Financial performance of tech companies and major financial institutions holds a significant influence over the money markets.
Earnings season serves as a window into the broader economic scenario. It isn’t solely about the numerical data; it’s equally about how investors perceive and react to the information once results are released.
Anticipation of the ‘Big Tech’ results
In the case of Intuitive Surgical, a US med-tech company specialising in robotic products, despite strong Q3 revenue and earnings per share growth (EPS), the market was disappointed because it fell short of the expected YoY revenue growth. Financial institutions, on the other hand, initially weathered bad news about rising unemployment forecasts, indicating that investors were initially lenient on them. However, this optimism quickly faded, and financials dropped relative to the S&P 500.
The upcoming week places the spotlight on Big Tech, with more than 40 percent of the S&P 500’s market capitalization set to unveil their earnings. The ten largest companies reporting this week account for over a quarter of the S&P 500’s market cap. Four of the so-called “Magnificent Seven” mega-cap firms, including Alphabet (GOOG, GOOGL), Amazon (AMZN), Meta Platforms (META), and Microsoft (MSFT), are poised to reveal their earnings results. After Tesla’s (TSLA) recent report disappointed investors due to Cybertruck delays, only two of these giants have yet to report: Apple (AAPL) and Nvidia (NVDA).
The investment community eagerly awaits these reports, seeking insights into market reactions and sentiment in the options market. For example, Alphabet Inc. (GOOG/GOOGL) is set to release earnings on Tuesday, with investors keeping a watchful eye on various key areas. These include the competitive landscape of YouTube against streaming services, the Google Pixel 8 launch, advancements in artificial intelligence (AI), the company’s robust cloud business, and the impact of AI on search and the options market.
Reaction of money markets
The outcomes of this week’s earnings will undoubtedly cast a significant impact on the overall market. Alphabet’s earnings are poised to offer valuable insights into YouTube’s rivalry with streaming services, AI advancements, and their cloud business. Microsoft’s earnings will reveal the repercussions of the Activision deal and the strides made in AI integration. Amazon’s report will be scrutinized for its cloud sales growth, logistics developments, and progress toward a US$1 trillion gross merchandise volume. Finally, Meta Platforms’ earnings will illuminate their metaverse plans, ad revenues, and free cash flow.
Anticipations in the options market indicate the likelihood of above-average movements in these stocks, with expected shifts ranging from 4.7 percent to 8.4 percent. Despite these forecasts, the overall sentiment for these companies remains cautiously optimistic, with options markets suggesting elevated risk levels. Fundamentally, these firms boast resilience, fortified by solid cash positions and growth potential.
Considering the augmented options premiums, investors keen on managing risk and seizing opportunities amid the forthcoming earnings reports from these tech giants might opt for longer-dated options coupled with shorter-dated premium selling strategies, such as diagonal call spreads.
When scrutinizing recent market trends, it’s imperative to recognize that investors often leverage corporate earnings reports to gain a broader perspective. Beyond the raw numbers, it’s the market’s response that holds the key. Even seemingly impressive performance figures can fall short of investors’ lofty expectations, resulting in a dip in stock prices. Good results may occasionally underwhelm, particularly for companies with high beta and high multiples.
Unpredictability of markets
On the flip side, the financial sector’s experience demonstrates a different reaction. JPMorgan Chase, Citigroup, and Bank of America’s earnings calls hinted at rising unemployment forecasts, ushering in a hint of pessimism. Yet, initially, financials outperformed the S&P 500 by almost 1 percentage point. However, their fortunes reversed soon after, reflecting the market’s unpredictable nature.
Each of these tech behemoths presents its unique set of challenges and opportunities, and options traders are gearing up for potentially substantial market movements in response to their earnings releases. While volatility is anticipated, the fundamental robustness of these companies remains a pivotal factor, guiding traders toward diverse strategies as they navigate the impending earnings season.
Financial performance of tech companies and major financial institutions is followed by the markets’ reactions to earnings results. Earnings season offers insights into the broader economic scenario.
However, it’s not just about the numbers; it’s also about how investors interpret the information post-release of results.