We saw a second day of gains then losses in major US indices. The stocks first rallied on the idea that the Federal Reserve (Fed) hawks may have gone ahead of themselves with the pricing of a 50bp rate hike in March, then gave in to the bad thoughts.
Nasdaq was trading almost 2% higher when the wind turned direction abruptly, sending the index below its 200-DMA. Nasdaq futures are down by 1% at the time of writing.
Is this the beginning of a further dive? It is possible. From a technical standpoint, the next meaningful supports stand near 14400 mark, the minor 23.6% retracement on post-pandemic rally, and near the 13000 mark, the 38.2% Fibonacci retracement, which should distinguish between the continuation of the post-pandemic positive trend a medium-term bearish reversal. It would take an additional 12% plunge before Nasdaq steps into a bear market.
Is it possible? Yes it is, because the macroeconomic environment is not necessarily supportive of the technology stocks, and small to medium sized companies have already been feeling the pinch of the prospects of higher interest rates since a couple of months now.
What kept the headline index so strong so far was the resilient Big Tech rally - which was based on expectations of strong earnings growth. And if the Big Tech doesn’t live up to expectations, Nasdaq could fall like a castle of cards.
Netflix (NASDAQ:NFLX) post-earnings: a disaster
In this respect, Netflix was the first FAANG stock to announce earnings yesterday and the market reaction was a disaster.
Netflix shares dived 20% to near $400 a share after the bell, despite the announcement of better-than-expected earnings for the Q4. Netflix earnings came in higher than the analyst forecasts, but all investors saw was mediocre subscription growth forecast of 2.5 million additional subscribers, far below than the near 4 million added the first quarter of last year, and far, far below the 6.3 million expected by analysts. Raising the monthly fees may explain a part of the subscriptions slowdown, and the end of the pandemic may explain the rest. Slowdown in subscriptions will certainly take a toll on the future earnings and Netflix stock will feel the pinch of the re-pricing.
So, we could expect a carnage at the open for Netflix, and other tech stocks. Disney (NYSE:DIS) and Roku (NASDAQ:ROKU) should suffer from a meaningful decline on their own subscriptions and shall see their share prices pulled lower by 3 to 5% in the session, as well.
And we may see other tech giants do poorly, given that the market mood wasn’t good before the Netflix earnings, and it’s certainly worse after the earnings.
50bp hike is just… too much
The Fed must fight back inflation because it’s gone just too far to threaten the economic health of the country, but they can’t do it with heavily hemorrhaging financial markets. Therefore, the idea of 50bp is certainly far stretched, and the corresponding pricing should be scaled back, which should give a certain relief to the risk assets in the coming sessions.
But of course, the corporate earnings must be strong, as the actual Big Tech pricing reflects a fantastic earnings growth for the coming quarters, and investors won’t settle with anything less than fireworks.