We are in the middle of earnings season right now, with significant reports coming thick and fast. In this situation, it is tempting to ask questions in search of a theme: Are tech companies outperforming traditional manufacturing? Is there something that is driving performance across sectors and industries, such as the advantage of pricing power in an inflationary environment? Are supply chain issues still relevant? Are traders putting even more weight than usual on guidance as opposed to performance? These are all valid questions and there are many more that could be asked, but this season, the more questions you ask, the murkier the picture becomes.
The fact is that so far, the only theme to Q2 earnings is that there is no theme. That's not necessarily a bad thing for those who like to pick individual stocks. Variation in performance within industries and sectors indicate that what matters right now are the fundamental factors that contribute to any businesses success; things like the quality of the product offered and the efficiency and execution achieved by senior management. Those things have not been where investors’ focus has been for a while, but they at least have the advantage of being identifiable and consistent.
That is why, for example, Union Pacific (UNP) is popping this morning, despite missing expectations on both the top and bottom lines. The results from last quarter aren’t what's causing the jump -- it is the announcement of a shake-up in the C-suite. Clearly, traders and investors believe that the reasons for the miss given in this report are just excuses, and the real problem has been a failure to maximize the business, not the nature of the business itself. Last quarter’s results at the company are seen as having no bearing on the company’s prospects and certainly not as a reflection of the state of the industry overall. That can be seen by the fact that their rival, Canadian Pacific (CP) is also trading higher this morning, despite UNP’s disappointing numbers.
A similar thing could be said about Snap's (SNAP) disappointing quarter. Their relative failure to attract advertising dollars doesn’t mean that the second quarter was a weak one for digital advertising as a whole. It just means that SNAP’s technology and maybe their execution wasn’t up to snuff. Even as they talk about weakness in demand for ads and their stock tumbles, Meta (META), who will report after today’s market close, is this morning indicating a significantly higher opening as I write this.
There is, however, one notable case this morning where one company’s woes are being reflected in the stock of a direct rival. "Woes" is probably not the right word to describe why Microsoft (MSFT) is trading lower. They beat expectations overall on earnings and revenue, but the market is ignoring that and focusing instead on slowing growth at Azure, their cloud computing division. This is why the stock is lower as I write. That relative weakness has led to a drop in their biggest rival in that space, Amazon (AMZN), in this morning’s premarket trading, too. Amazon will report next week and, like Microsoft, the market’s focus over the last couple of years has been on their performance in cloud services rather than their core business. But does a disappointment at Microsoft necessarily mean a disappointment from Amazon is coming next week?
There are reasons to think it might. Clearly, this is not about leadership, for sure. Microsoft has Satya Nadella at the helm, someone who has turned the company’s fortunes around since he took over and who is widely regarded as one of the best CEOs in the country, if not the world. Nor does it appear at first glance to be about the product. Azure has been a market leader in cloud computing for a while, and Microsoft’s involvement with OpenAI and Chat GPT would seem to give them an advantage in the AI space too.
However, Chat GPT is a consumer-focused product, and AI for businesses is not the same thing. In that area, Amazon is making big strides, and buyers are beginning to understand that Chat GPT isn’t the be all and end all of AI. Now it could be that Microsoft’s falling growth rate at Azure is the result of weakness in cloud computing generally, but it could also be as much to do with increased competition and wider recognition of other services. If that is the case, then AMZN’s pullback to close to a support level around 125 this morning is an opportunity to buy at a discount.
Nor will that be the last such opportunity this earnings season. When the market reaction to earnings is about the fundamental performance of individual companies rather than any industry-wide or country-wide theme, any copycat move by a rival’s stock should be looked at closely. In that situation, company A’s results tells us nothing about the prospects for company B, but traders, and particularly those of the algorithmic variety, are used to reacting in a certain way to a beat or a miss, including buying or selling stock in similar companies. When that happens, as it did overnight with AMZN, it can be a good opportunity to fade that move. Even if Amazon does disappoint, the bad news will already be priced in before it comes and, if they merely meet published expectations, the stock will pop.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
Read Martin's Bio