Earnings boost points to greater volatility for US markets

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Raindrops hang from a sign for Wall Street outside the New York Stock Exchange in Manhattan in New York, New York, U.S., October 26, 2020. REUTERS/Mike Segar/File Photo

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NEW YORK, Feb 4 (Reuters) – Diverging earnings from megacap growth stocks are fueling wild swings in stocks, opening the door to more volatility on the heels of last month’s sharp decline as investors grow more discerning in the names they choose.

Many market participants had hoped that earnings from big tech-focused stocks that have dominated markets for years would provide stocks with some modicum of support after January’s sharp declines, which saw the Nasdaq Composite (.IXIC) drop by 9% and the S&P 500 (.SPX) dropped 5.3% after a hawkish turn from the Federal Reserve.

But this week’s earnings from megacap growth stocks have rattled investors.

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“I fear that if we continue to see major moves in widely held stocks, investors will be put off by the markets,” said Dennis Dick, a proprietary trader and market structure consultant at Bright Trading LLC. “One thing is certain, volatility is here to stay.”

Wall Street’s fear gauge, the Cboe Volatility Index (.VIX), hit its highest level in a week on Thursday as investors punished the owner of Facebook Meta Platforms (FB.O) for falling short of their expectations , with Meta shares falling 26.4%. some $200 billion of its market value – the largest ever decline in the market value of a U.S. public company. L4N2UE1L9

After the bell, sentiment appeared to turn around as Amazon.com Inc delighted investors by raising its Prime subscription rate and soared in after-hours trading on Thursday, increasing futures with him. Earlier in the week, shares of Google parent company Alphabet Inc (GOOGL.O) surged after posting record earnings. L4N2UE30Z

Wild moves can offer a glimpse of what awaits markets in the months ahead as looming interest rate hikes make investors less forgiving of bad news and dampen the appeal of high-value companies whose Stocks have thrived over the past two years amid the COVID -19 pandemic.

“The market is very volatile and very choppy and if you’re going to report bad earnings, you have to expect that you’ll be taken to the stake,” said Phil Orlando, portfolio manager at Federated Hermes. “The companies that buck this trend are the companies that can produce better numbers and more optimistic forecasts.”

Overall, the surprise factor – which shows the rate at which companies have significantly exceeded analysts’ estimates – fell to 8.8% in the fourth quarter of 2021 from 16% a year ago. In the communication services sector, where Meta is represented, the factor fell to 6.1% from 24.3%, according to data from Refinitiv.

TAKE AND CHOOSE

The divergence of fortunes prompts investors to choose with caution.

Josh Wein, portfolio manager for the Hennessy Technology Fund, focuses on companies that can demonstrate pricing power – or the ability to maintain or grow margins despite rising raw material costs and wages in raising prices – in the face of rising inflation.

Wein, who has no position in Meta, expects to see a widening performance gap this year between companies such as Microsoft Corp (MSFT.O) and Oracle Corp (ORCL.N) which mainly focus on business customers, and those like Netflix Inc and Meta that rely more on consumer preferences in an increasingly competitive landscape.

“This is a time when companies with wider moats around their businesses are going to outperform,” he said, citing his optimism about companies such as Nvidia Corp (NVDA.O) and Alphabet.

Julie Biel, portfolio manager at Kayne Anderson Rudnick, which owns shares of Meta Platforms, focuses on software companies that sold off during the Nasdaq index’s broad declines in December and January, but are on dips. niche markets.

Among its holdings is Duck Creek Technologies Inc (DCT.O), which provides cloud software for P&C insurance companies. Shares of the company are down about 17% year-to-date.

“I really took it on the chin in January, and now I have the opportunity to reinvest in companies that have strong pricing power,” she said.

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Reporting by David Randall; Additional reporting by John McCrank; Written by Ira Iosebashvili; Editing by Megan Davies and Muralikumar Anantharaman

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