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Inside Markets — High Bar

High Bar

January 31, 2024

US equities are lower after overnight earnings failed to meet a very high bar, with post-earnings downside in MSFT and GOOGL pressuring the market cap weighted SPX and Nasdaq 100 (NDX) with the two stocks accounting for 11.5% and 14.1% respectively. Neither company missed sell-side estimates, but GOOGL did fall short of the most optimistic buyside numbers. Shares of AMD are also lower after its data center GPU guidance missed the most optimistic target.  Note that both MSFT and GOOGL guided to higher capex numbers.  This may have disappointed shareholders (especially in GOOGL) but it’s a clear, positive readthrough for suppliers like AMD and others. Growth in MSFT’s cloud computing services (Azure) was ahead of plan at +28%. AI workloads contributed 6 percentage points of the 28% growth, up from 3 points last quarter and 1 point in the preceding quarter.  

Yesterday, we explained that the SPX needs to maintain levels above ~4800 for the rally to stay intact.  We don’t follow the Magnificent 7 (UBXXMAG7) from a technical perspective because the index is so new, but we do follow the slightly more mature NY FANG+ Index (NYFANG).  The NYFANG is an important index to follow as we look for signs of rally exhaustion. The NYFANG is pulling back from pattern resistance in the 9550-9725 range to 9110 at the moment.  Sustained closing levels below 8875 would signal a trend reversal and present more challenges for the broader benchmarks.

Today’s lower bond yields and curve steepening would be supportive developments for the Russell 2000 (RTY) were it not for earnings-related weakness in regional banks. The RTY trades below range resistance at ~2040.  In our opinion, the RTY needs an emerging cyclical recovery theme to break above that level, which we consider unlikely.  An upside breakout in the RTY would broaden the rally and make it more durable. Failure for the RTY to break above ~2040 would signal increased likelihood that the SPX and NDX correct before the start of a policy-induced bull market.

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