This week is a massive one for big tech investors. Tomorrow, Microsoft (MSFT) and Alphabet (GOOG, GOOGL) get things underway, then Meta Platforms (FB) reports on Wednesday, followed by Apple (AAPL) and Amazon (AMZN) on Thursday. By Friday morning, we will know a lot about how all of those companies performed last quarter and how they feel about the rest of this year. However, the unique circumstances that dominate the market right now means that we will learn almost as much about the market’s current mood as we do about actual performance and expectations.
With companies as large as those above, a mixed bag of earnings is almost inevitable. There will be disappointments from some firms, or even areas or divisions within them, and pleasant surprises in others. How the stocks react depends largely on whether traders choose to focus on the good or the bad. Will they look at the positives or the negatives? You might think that that depends on where those positives and negatives come from, but having worked in dealing rooms around the world for decades, I can assure you that isn’t necessarily the case. Traders’ overall mood dictates what they react to and what weight they attach to the performance of each company or division.
Traders, like everyone else, are prone to confirmation bias. They seek out news that conforms to their world view and place more weight on that than anything that contradicts that view. They find justifications for their behavior, of course, and would probably tell you if asked that they do no such thing and simply evaluate data, but there is ample evidence that that is not the case.
Last quarter, for example, early reporters Apple, Microsoft, and Alphabet all beat earnings handily and gave generally positive guidance. As a result, their stocks climbed pretty consistently on subsequent days, even though going into their releases there had been a generally bearish view of tech. Their numbers, it seemed, belied that view. However, when Meta and Amazon both reported an earnings miss on February 2, even the three big tech names that had just reported great Q4s and positive outlooks turned tail and dropped with FB and AMZN. The good news that contradicted the bias was forgotten. Traders chose instead to see the bad news that confirmed their bias that big tech was in trouble.
That is clear from the above chart for the Nasdaq tracking ETF, QQQ. The Apple and Microsoft results reversed declines and lifted the entire index for a few days, with Alphabet’s blowout on February 1 adding to those gains. But that all changed on February 2 when FB and AMZN announced their misses and QQQ started a decline that would last six weeks. Nor was this just a case of the index being unduly influenced by those results and the drops in the stocks concerned. Even tech companies who had reported good results saw their stocks top out on February 2 and start to fall. The logical explanation for that is that traders had almost reluctantly accepted the good news from big tech at first, but the minute they got bad news, they extrapolated it to apply to every stock in the space, even those where the evidence had already suggested strength.
So, as we enter a week of big tech earnings, traders and investors should exercise some caution. I think it is safe to say that the prevailing mood right now is negative, so there is a danger that even if the majority of the big names beat expectations and issue relatively upbeat guidance, and just one or two miss, traders will see the bad news as reason to sell the entire sector. That means that it will probably pay to defer any decisions until all five have reported rather than jumping in with both feet. Should MSFT and/or GOOG do tomorrow what they did last quarter, and knock it out of the park, there will presumably be a positive reaction initially but, as we saw three months ago, that isn’t guaranteed to last if traders are given a negative to focus on a few days later.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.