The Tech Trade Cools Off With Earnings On Deck

By: Spencer Israel

As we head into August, the tech trade that seemingly carried the market out of the March bottom has suddenly lost a bit of luster.

One month ago we were wondering (again) whether the FANG stocks were overvalued. But the wave of momentum that carried tech stocks like Facebook, Apple, Alphabet, Amazon, Microsoft, Netflix, and Shopify through April, May, and June appears to have topped out—at least for now. 

With the exception of Alphabet, each of those stocks made a new all-time high on or around July 13. All of them have since come off those highs, and the members of this group that had run up the most in 2020—Amazon, Netflix, and Shopify—have since sold off the hardest. 

Stock All-Time High Made (YTD Performance As Of Date) Since ATH*
AAPL July 13, 2020 (35%) -7%
AMZN July 13, 2020 (78%) -10%
FB July 13, 2020 (21%) -7%
GOOG July 21, 2020 (18%) -4%
MSFT July 9, 2020 (36%) -7%
NFLX July 13, 2020 (76%) -16%
SHOP July 13, 2020 (166%) -13%

*As of July 24, 2020 close

So what happened on July 13, 2020 that marked a turning point? Sometimes it’s just a matter of market rotation. 

For three months, this group of stocks seemed to single-handedly lead the market higher. And that outperformance even made its way to the broader technology sector, which blew the other sectors out of the water from April-June 2020. But all good things must come to an end—or at the very least, a pause. 

Despite the fact that the S&P 500 has continued to move higher on the back of hopeful vaccine headlines in recent weeks, tech has not participated. And it’s not just the mega-cap names that are lagging. Over the last month, the Technology Select Sector SPDR Fund (XLK) is the third-worst performer of the SPDR sector ETFs. Only the energy and real estate sectors have been worse.


It’s worth pointing out that XLK does not include Amazon, Alphabet, Facebook, or Netflix. But though they’re technically categorized in different sectors, the group of mega-caps tends to trade together. So, it’s not a surprise to see them all lag the overall market at the same time. 

Upcoming Earnings Catalysts
All of this will come to a head this week, as tech takes center stage on the earnings calendar. 

July 29 AM

July 29 PM

July 30 PM

This group will have to contend with the fact that investors have thus far been less than thrilled with earnings from the mega-cap tech names. Netflix warned on July 16 of slowing subscriber growth in Q3 and Microsoft reported slowing growth in its cloud segment on July 22. Shares of both stocks have yet to rebound from their post-earnings drops.

The bull case for big tech in the short term is that the unenthusiastic reactions to NFLX and MSFT may have set the bar low. The bear case is that thanks to the huge rallies in the spring, any good news from these companies has long since been priced into their stocks. 

If there’s going to be a week that either solidifies the trend of tech weakness or ends it, it could be this one. 

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