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With Apple and others, stocks ran ahead of reality

Michael Santoli
Michael Santoli

Companies closed their books for last quarter on June 30 – more than three weeks ago. So how did the story of the quarter change so much in the past week or two - going from “earnings are just good enough” to “earnings weren’t so good at all?”

In the last couple of weeks, traders celebrated results from tech and growth-stock bellwethers Netflix (NFLX), eBay (EBAY), Intel (INTC), and especially Google (GOOGL, GOOG) that were modestly better than anticipated.

This week so far, reports similarly in the zone of forecasts from Apple (AAPL) and Microsoft (MSFT) were met with disappointment and reflex selling after Tuesday’s close and early today.

The fact is that the only thing that’s truly changed over that span is stock prices and the investor emotions and expectations that rose with them.

In the past week, Apple shares were up 4%, and they gained as much as 11.5% from low-to-high over the two-week market rebound led by the Nasdaq (^IXIC). Microsoft stock got a similar 3.6% boost in the latest week, and tacked on more than 9% from low-to-high during the rally.

So the stocks went into the company reports riding at higher prices and with traders playing for the same sort of post-earnings bump stocks were getting a week ago.

Fashioning a narrative out of earnings season is always a bit of an artificial exercise, of course. There’s no clear plot line being followed by the thousands of companies offering three-month business updates.

The broad story has remained about the same this year: Profit growth has flattened out as the cycle has matured, economic growth softened and the U.S. dollar has surged. A handful of organic-growth leaders are pulling away from the pack, as many companies continue to try and please investors with mergers, buybacks and other financial maneuvers.

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The question has been, and remains, what the market is willing to pay for earnings at this juncture. And, generally speaking, buyers have stopped getting aggressive bidding for shares as we’ve returned to the top end of the longstanding trading range in the S&P 500 (^GSPC).

As discussed here late last week, the bellwethers of the Nasdaq had taken the fore in the absence of broader cyclical improvement, and the last spurt in stocks came as investors grabbed at mega-cap stocks to get into the market they feared might run higher without them.That was a hint the rally was nearing a wall.

The stunning response by investors to Google’s report distilled all these things together. A slightly better-than-feared earnings print joined with a whisper of expense discipline, a deft touch by a new CFO on the conference call and a laggard, under-owned stock to drive the largest gain in market value in history on Friday.

In all, earnings season has been fine, on its own skewed terms. A slightly larger majority of companies than usual is outpacing estimates, though revenue growth is more scarce and guidance has been mixed.

Not much, in the end, to decisively move us out of this range, especially given the dynamics of the last push toward the old market highs. It’s being noted everywhere that this rally has been unusually narrow - or, if you prefer, selective.

This is either a cleansing respite for the majority of stocks as the growth leaders hold things together until the economy and earnings reaccelerate, or the typical disjointed action that emerges late in a bull market.

Don’t believe anyone who speaks with too much conviction about which of these scenarios is playing out.

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