$10 Trillion In Big Tech Earnings Are Make-Or-Break For The Stock Market

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This is the busiest week in the earnings season for publicly listed US companies, with more than 100 companies reporting earnings results for Q4 of 2023. Chief among those reporting their Q4 results this week is Google's parent company, Alphabet, along with Apple, Meta, Amazon, and Microsoft—the five of whom total $10 trillion in market value. Consensus EPS expectations are 5% above estimates. Here is each major company and their respective consensus EPS estimates:

Tuesday: Microsoft and Apple

• Microsoft: EPS forecast $2.76 up from last year's $2.32
• Alphabet: EPS forecast $1.60 up from last year's $1.05

Thursday: Apple, Amazon and Meta

• Apple: EPS forecast $2.09 up from last year's $1.88
• Amazon: EPS forecast $0.81 up from last year's $0.21
• Meta: EPS forecast $4.84 up from last year's $3

Amazon already announced it is abandoning its planned $1.4 billion acquisition of iRobot—it's not uncommon for companies to do things like this in the days leading up to earnings calls, a form of window dressing to get rid of the neutral/negative news to get the call itself cleared for only the good news.

With all 5 of these tech giants who lead the S&P 500 in a very big way set to smash earnings this week, it's worth counterbalancing that bullishness with the fact that the S&P 500 is already in overvalued territory.

CNN's Fear & Greed Index has the stock market entering extreme greed territory, of 75 points. Its index is based on a combination of market sentiment paired with the price of major US stock indices relative to their moving averages.

The S&P 500 is currently 376 points above its rolling 100-day average, which is a wider gap than at any point this cycle—further confirming the extremely overbought, greedy territory that the US stock index leader is in. See the histogram in the bottom pane to see how this gap has fluctuated throughout the cycle. It has never gotten any wider than where we are now without reversing:

Additionally, the 12-month forward earnings yield for the S&P 500 has returned to pre-COVID levels. Barring the crash during 2020 and boom in 2021, the last time that the expected earnings yield for the S&P 500 was this low was just after the dot-com bubble burst in 2002. Apart from tech, earnings estimates from here on out are generally being revised lower:

The risk-reward profile for stocks is also at its lowest since the dot-com crash. Said in a different way, the risk premium for owning the S&P 500 compared to the risk-free 10-year US Treasury yield is at its lowest in 23 years. This can be interpreted that we are returning to an era of properly-valued stocks, and decades of speculative mania used to engineer our way out of the Great Financial Crisis is over. Additionally, given the level of overvaluation stocks are currently exhibiting, and how yields are likely to stay high given the level of Treasury issuance, this multi-decade low ERP could point to stocks approaching their cycle top.

This is a make-or-break week to determine whether or not we are in for a cycle top or a manic continuation into summer and beyond. That outcome rests not only in whether tech earnings meet, beat, or miss expectations but in the decision that the Fed delivers during its Wednesday FOMC meeting and press conference.

The Fed is expected to forecast rate cuts for as early as Q2—markets have priced this for more than a month, and it would be the most dovish scenario for Wednesday's Fed meeting, providing more wind in the sails of stocks should most of the S&P 500 beat earnings as expected this week. If the Fed decides to tilt its language hawkishly and retract talk of imminent rate cuts, it would be an unexpected shift, catching markets off guard and likely tightening financial conditions—pair that with an equally unexpected across-the-board earnings miss for S&P 500 companies, particularly the big names, and a rolling top for equities is more likely than a booming continuation into the summer.

A Treasury refunding announcement is also set for Wednesday, where it is expected to announce an increase in the sale of long-term debt. This is yet another factor that will decrease aggregate market liquidity in the coming months and be a headwind for risk assets. Higher supply issuance drives yields up, ceteris paribus, which means banks and investors will chase ever-higher risk-free yields on US Treasuries and divest from other assets and facilities to capture them.

The Fed's RRP facility is nearly drained, falling by roughly $20 billion a day as investors rotate into higher-yielding US Treasuries. It will be fully depleted by late March or early April:

After that date, most of the capital investing in Treasuries will come from bank reserves, which is much more convex with risk:

Another factor to consider in the Fed's decision-making is in the political realm, where re-election for the incumbent President rests solely on asset prices now according to survey respondents who view most other major issues as being totally bungled. If those are lost in a stock market top, it would hurt the incumbent politically—so, expect any announcement of Fed cuts to be, at least in part, influenced by this. After all, the Fed was created solely to advance the interests of the regime at large at the expense of the American people. Any notion of institutional separation is performative only, their interests are one and the same when it counts.

Strong tech earnings in line with consensus estimates for 5% earnings-per-share beats across the board for S&P 500 companies paired with the announcement of rate cuts at the Fed would likely be the jet fuel needed to push the S&P 500 to 5000 points and beyond. On the contrary, disappointing tech earnings followed by a more hawkish Fed than anticipated would likely do the opposite. Keep it here at Theya Research for more coverage as this eventful week unfolds!

Hope you all have an excellent start to your week,

Joe Consorti

Theya is an app for simplified Bitcoin self-custody. With its 2-of-3 multisig custody solution, you can enjoy maximum security for your Bitcoin and the peace of mind that comes with it.

Download Theya on the App Store and declare your sovereignty today.