In a big week for tech earnings, mood may matter more than data

Jits a huge week for big tech investors. Tomorrow Microsoft (MSFT) and Alphabet (GOOG, GOOGL) kick things off, then Meta Platforms (FB) reports on Wednesday, followed by Apple (AAPL) and Amazon (AMZN) on Thursday. By Friday morning, we’ll know a lot about how all of these companies performed last quarter and how they feel about the rest of this year. However, the unique circumstances currently dominating the market mean that we will learn almost as much about the current market mood as we do about actual performance and expectations.

With companies as big as the ones above, a mixed bag of revenue is almost inevitable. There will be disappointments in some companies, and even areas or divisions within them, and good surprises in others. The reaction of stocks largely depends on whether traders choose to focus on the good or the bad. Will they look at the positives or the negatives? You may think it depends on where these positives and negatives come from, but having worked in trading rooms around the world for decades, I can assure you that is not necessarily the case. The general mood of traders dictates what they react to and what weight they attach to the performance of each company or division.

Traders, like everyone else, are subject to confirmation bias. They seek out information that is consistent with their view of the world and place more weight on it than anything that contradicts that view. They find justifications for their behavior, of course, and would probably tell you if asked that they don’t do any such thing and just evaluate the data, but there’s plenty of evidence that this isn’t the case .

Last quarter, for example, early reporters Apple, Microsoft and Alphabet all beat earnings easily and gave generally positive guidance. As a result, their shares climbed fairly steadily over the following days, although at the start of their outings there had been a generally bearish view of technology. Their numbers, it seemed, belied this view. However, when both Meta and Amazon reported a revenue shortfall on Feb. 2, even the three big tech names that had just posted great Q4s and positive outlooks turned the corner and fell along with FB and AMZN. The good news that contradicted the bias was forgotten. Traders instead chose to see the bad news that confirmed their bias that big tech was in trouble.

This is evident from the chart above for the Nasdaq tracking ETF, QQQ. Earnings from Apple and Microsoft reversed declines and lifted the broader index for a few days, with Alphabet’s February 1 blowout adding to those gains. But everything changed on February 2 when FB and AMZN announced their failures and QQQ began a decline that would last six weeks. Nor was this a case of the index being unduly influenced by these results and the declines in the stocks concerned. Even tech companies that had announced strong results saw their stocks peak on Feb. 2 and begin to fall. The logical explanation for this is that traders had almost reluctantly accepted the good news from big tech at first, but as soon as they got bad news, they extrapolated it to apply to all stocks in the world. space, even those where the evidence had already suggested force .

So, as we enter a week of big tech profits, traders and investors should tread carefully. I think it’s safe to say that the prevailing mood at the moment is negative, so there is a danger that even if the majority of the big names are beating expectations and issuing relatively optimistic forecasts, and that one or two miss, traders will see the bad news as a reason to sell the whole sector. This means that it will probably be advantageous to postpone any decision until the five have reported rather than jumping in with both feet. If MSFT and/or GOOG do tomorrow what they did last quarter and knock it out of the park, there will likely be a positive reaction initially but, as we saw three months ago, that doesn’t is not guaranteed to last if traders receive a negative to focus on a few days later.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

About Marion Alexander

Check Also

Growth Opportunities in the Global Therapeutic Contact Lenses Market 2022-2029 Bausch + Lomb, Incorporated., Vistacom, Inc., Alcon (Novartis AG)

The Global therapeutic contact lens market The 2022 report covers all comprehensive industry factors that …