With earnings season underway, it looked to be a positive week for the markets, until the sell-off Friday. The Dow Jones Industrial Average fell below 17,000, losing 123.23 points on the day. The S&P 500 and Nasdaq also lost ground, giving up 0.48 percent and 0.50 percent, respectively. For the week, the S&P 500 was flat, while the DJIA lost 0.90 percent. The Nasdaq, however, moved higher for a second week, gaining 0.40 percent.
Apple (AAPL), a staple in technology funds, beat estimates by a solid margin and is pushing the stock price towards the psychologically important $100 level. That is also the 7:1 pre-split high for Apple, so a push through into the low $100s would be very bullish.
Facebook (FB) was another technology firm that provided sound results, which the company’s earnings more than doubling from the prior year. Earnings were 42 cents per shares, well ahead of estimates of 32 cents per share. The stock jumped 5 percent and provides a big lift to the social media sector. Only last week, the sector took a hit from the Federal Reserve report that said valuations were “stretched” in the sector. Whether you agree with the Fed, Facebook’s strong results this week show how quickly those valuations can be brought down.
The big disappointment came from Amazon (AMZN), a firm invests very heavily in technology infrastructure and operates on razor thin margins. In the prior quarter, the firm lost more than $100 million, despite nearly $20 billion in revenue. Shares slumped 10 percent in the wake of the report.
Even though Amazon’s report was weak, the general trend for the sector is very positive. Both Intel (INTC) and Microsoft (MSFT) have seen their share prices rally strongly on good earnings (in the case of Intel) and a reorganization plan (from Microsoft). These two giants remain important components in many technology funds and they are breaking out of decade long basing patterns. If this trend in tech shares continues, the Nasdaq could exceed its old high at some point in the next 12 months.
Non-tech blue chips delivered respectable results as well, including Ford Motor (F) and Starbucks (SBUX). Caterpillar (CAT) in particular, disappointed. Even though earnings beat expectations, revenues were lower than expected. This implies the slower growth in China remains an issue, as Caterpillar benefits from strong natural resource demand. China managed to increase growth in Q2 with targeted stimulus measures, but these have few long-term effects and the continued real estate slowdown is keeping a lid on resource demand.
The good news is earnings report this week lifted the S&P 500 to a new all-time high. The DJIA, before Friday, was on the verge of a new high. The sell-off today should not overly concern investors. Finally, as has been the case for much of the year, small caps remain the weak spot. There is reason for optimism with short-term technical indicators turning up, which could lead to another period of outperformance.