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FAANG, FAANG, FAANG - Global Week Ahead

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In the Global Week Ahead, Q3 earnings season really ramps up.

U.S. earnings will be dominated by FAANG companies.

How did Zacks Reseach Director Sheraz Mian develop this theme?

Read on…

Recent performances of the five largest Tech companies on deck to report Q3 results this week have been mixed.

 


Alphabet & Microsoft are riding high. Amazon & Facebook struggle to gain traction.

Consult the FAANG group’s recent stock market performances in the chart below. This shows one-year share returns performances of —

 

  • - The S&P 500 index. It is the light red line, fourth from top (up +32.9%), then
  • - The Zacks Tech sector is the purple line, third from top (up +37.1%) and
  • -- Microsoft – dark green line; second from top (up +42.9%)
  • -- Apple – red line; third from bottom (up +29.6%) and
  • -- Facebook – blue line, second from bottom (up +13.3%) and
  • -- Amazon – orange line at bottom (up +4.7%)

 

Zacks Investment ResearchImage Source: Zacks Investment Research

 

As you can see above, Facebook and Amazon are clearly the laggards, with Facebook’s recent leg down reflective of a seemingly never-ending run of bad news for the company.

The market has pushed Facebook down following the Snap (SNAP - Free Report) quarterly report, which likely improves the odds of a positive surprise from the social-media giant after the market’s close on Monday (10/25).

Microsoft, which reports after the closing bell on Tuesday (10/26), along with Alphabet, Advanced Micro (AMD - Free Report) and Twitter (TWTR - Free Report) has become a unique tech player that enjoys multiple growth engines, from enterprise software to cloud leadership and many other things.

No doubt, Microsoft shares are the second-best performer in this group in the above chart, second only to Alphabet.

These five companies combined now account for 22.9% of the total market capitalization of the S&P 500 index.

Second only to the Tech sector’s weight in the index at 32.8% and above the other 15 sectors, including Finance at 13.8%.

Let’s move on…

According to Reuters, the trading week ahead (outside the US) will also offer—

  • - European Central Bank (ECB) policy makers another chance to ponder just how sticky inflation really is
  • - In China, an imminent default of China Evergrande Group might be off the cards for now, but troubles seem far from over
  • - Markets in Britain are bracing for new budget forecasts, while bitcoin is back for a rollercoaster ride


Here are Reuters’ five world market themes, reordered for equity traders.

(1) Four FAANG Stocks Report Earnings

Tech stocks and high global yields aren’t always a happy mix, and earnings in coming days will give investors something to chew over as four out of the five FAANG stocks — Facebook, Amazon, Apple and Google parent company Alphabet — are expected to report.

FAANG's breakneck growth and outsize weighting in the S&P 500 has helped drive markets higher for more than a decade. Barring Amazon, each is expected to report September quarter earnings-per-share set to beat last year's numbers, according to I/B/E/S data from Refinitiv.

Strong quarterly numbers could help tech and growth stocks broaden the lead they have established over value-focused peers in this year's tug of war, as markets find themselves caught between a powerful economic rebound and soaring commodity prices on one side, and rising Treasury yields and inflation on the other.

(2) Bitcoin. Don’t forget. Bitcoin Moving Up

Bitcoin's rollercoaster year has stepped up a gear. The biggest cryptocurrency hit an all-time high of $67,016 on Wednesday, fueled by bets the first U.S. bitcoin futures exchange traded fund would pave the way for money to pour into digital assets.

Bitcoin's latest peak came six months after its last, its journey in between peppered by wild price swings dominated by a cryptocurrency crackdown in China.

Crypto analysts reckon the dawn of U.S. ETFs — a dozen others are in the pipeline — will support prices. Others say they view bitcoin as a hedge against inflation is a bigger factor. Whoever's right, one thing is clear: bitcoin volatility isn't going anywhere.

(3) If/When Will China’s Evergrande Blow Up?

It seemed almost curtains down for China Evergrande Group, the embattled property giant, whose debt woes have rippled through global financial markets.

Evergrande supplied funds to pay interest on a U.S. dollar bond days before a deadline would have seen it plunge into formal default. But that's just the first payment deadline of many due in the coming months and years, with little doubt the group will have to restructure eventually, with other companies also under pressure.

As Evergrande moves to an encore, its debt drama will remain closely watched as a guide for how Beijing will deal with other major firms in financial trouble. Its woes have also led to a major reassessment of the premium investors demand for holding riskier Asian credits.

(4) European Central Bank on Deck: Thursday

Not for the first time — and likely not the last — the European Central Bank has a delicate balancing act on its hands.

At its meeting on Thursday, it will face pressure to acknowledge that inflation is proving stickier than anticipated. The U.S. Fed will likely start tapering within weeks, Bank of England comments suggest a UK rate hike is coming soon and the likes of Norway, New Zealand have already tightened.

Will the ECB follow?

It has good reasons, such as subdued wages, to stick with its message that long-term price pressures remain weak and surging energy prices could hurt consumer spending and growth. But markets don’t square with the ECB’s policy guidance, and are pricing a strong chance of a rate hike by end-2022.

(5) U.K. Budgets on Wednesday

UK Chancellor Rishi Sunak will take the stand on Wednesday to deliver his latest budget forecasts. They are expected to show borrowing in the 2021/22 financial year is on track to come in around 40 billion pounds ($55 billion) below March predictions, thanks to faster economic growth.

But Sunak — who has adopted a more hawkish fiscal stance than many of his peers — is facing a pretty bleak backdrop: The combination of higher inflation and lower growth coupled with labor market shortages and supply chain disruptions due to Brexit and COVID-19 are making investors and policy makers uneasy.

Meanwhile, the pound has failed to capitalize on rising bets of an impending Bank of England rate hike, as some investors believe that policymakers may be making a mistake by tightening policy too quickly, turning the British currency more volatile than its major rivals in recent days.

Top Zacks #1 Rank (STRONG BUY) Stocks

(1) AutoZone (AZO - Free Report) :
This is a $1,832 a share stock. There is a $39.6B market cap as a result of inflated prices. That’s not a typo. I see a Zacks Value score of D, a Zacks Growth score of C and Zacks Momentum score of C.

(2) HP Inc. (HPQ - Free Report) : This is a $30 stock, with a market cap of $35B. So right now, the granddaddy of Silicon Valley is worth less overall than an auto parts stock. I see a Zacks Value score of A, a Zacks Growth score of B, and a Zacks Momentum score of F.

(3) Rocket Companies (RKT - Free Report) : This is in ‘tech services,’ but it is really a home mortgage company. That space has been hot. There is a $16.50 share price and a market cap of $32.8B. I see a Zacks Value score of B, a Zacks Growth score of F and a Zacks Momentum score of C.

Key Global Macro

Focus on a swath of monetary policy decisions across Wednesday and Thursday.

On Monday, the Chicago Fed National Activity Index and Dallas Fed Manufacturing Business indices come out.

Germany’s IFO indices for October have come out too. Business Climate reached 97.7, a hair shy of 97.8 expected. Current Assessment outperformed expectations to 100.1 from a 99.3 estimate. And Expectations came up short: 95.4 versus 96.1. Ultimately, though, this represents strong across the board.

On Tuesday, the Case-Shiller Home Price Index for August (lagged 2 months) should be +20% y/y. Is a top in here? I think so.

On Wednesday, the Bank of Canada (BoC) offers its monetary policy report and a rate decision. They aren’t waiting on Powell, by the way. But 0.25% is the likely policy rate.

The Bank of Japan (BoJ) is out with its rate decision too. -0.1% is the policy rate.

On Thursday, the European Central Bank (ECB) hits the tape. -0.5% is the deposit rate (Note: that’s a different concept than a short-term policy rate). Their policy rate is 0.0%.

On Friday, Germany’s Q3 real GDP growth rate should be up +2.4% y/y.

The Euro Area’s GDP growth rate for Q3 should be up +3.5% y/y.

Conclusion

At an S&P 500 index level of 4,544 entering the week, it will be interesting to see:

Can the 22.9% share owned by mega-cap tech stocks move that number still higher?

That’s it for me.

Happy trading and investing to all!

Warm regards,

John Blank

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