Intense Tug-of-War: Sensitive US Stocks vs. Mag 7 Earnings
As October draws to a close, the U.S. stock market is entering a phase fraught with volatility, especially ahead of the highly anticipated earnings reports from the globally watched "Mag 7" tech giants.
In addition to non-farm, GDP, and PCE data, this week also sees earnings reports from 170 S&P 500 companies, which account for 47% of market capitalization.
According to the latest research report from Bank of America Merrill Lynch, the vulnerability facing U.S. stocks has reached a record level, making investors wary of the upcoming earnings season.
Bank of America believes that investors are paying more attention to individual stock performance amidst the dense release of earnings reports. Investors need to be extra cautious in this "most sensitive U.S. stock market in history" environment.
"High Sensitivity Period" Before Earnings Reports
The report from Bank of America Merrill Lynch points out that 2024 has become one of the most violently reactive years for U.S. stocks in the past two decades, especially after earnings releases, where this volatility is particularly evident.
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Data shows that the number of "vulnerability events" (i.e., situations where daily price fluctuations exceed three times the standard volatility) for technology stocks in the S&P 500 index is approaching historical highs.
"The vulnerability shocks in 2024 are larger and more frequent than almost any other year since 1992."Data indicates that the actual earnings reactions in this earnings season have exceeded the previous market consensus expectations, which has only happened for the second time in history. This implies that during the earnings period, stock price movements tend to be more intense than market estimates.
The report mentions that Tesla's 22% increase following its recent earnings release serves as a typical case, while the market's implied volatility expectation was only 4.6%. This unexpected intense volatility reveals a "high sensitivity period" for individual U.S. stocks when earnings are announced.
Furthermore, due to the potential distortionary impact of strikes and hurricanes on the upcoming U.S. October employment data and manufacturing index, Bank of America advises investors not to overreact to any potential weak data.
Bank of America estimates that the October non-farm employment data will record around 100,000 new jobs, with about 50,000 potentially offset by strikes and hurricane factors. At the same time, the unemployment rate is expected to rise to 4.2%.
Mag 7: Market Test for Tech Giants
The report points out that the option pricing for Mag 7 companies is currently low, which may mean that the market has not fully reflected the volatility risks that these companies' earnings reports may bring. Bank of America believes that the options for Meta, Google, and Microsoft are relatively cheap, but overall, Apple's options are more noteworthy.
The research report also points out that although the market-level volatility is low, at the individual stock level, the market has entered a "stock picker's paradise." Amidst the dense release of earnings reports, Bank of America advises investors to pay more attention to the performance of individual stocks.
Bank of America believes that the current market volatility is not just a phenomenon of the earnings season; the overall market sentiment and macroeconomic uncertainty in 2024 have exacerbated this situation. Especially for large technology companies, investors need to be cautious about the potential intense stock price fluctuations when earnings are released.
