Biggest Tech Companies's Latest Earnings Report Might Be a Warning Signal for Investors

As COVID-19 swept around the globe, we saw the global stock market plummet, only to see it bounce right back to its all-time high immediately. Now, both S&P 500 and Nasdaq are hovering around their all-time-highs despite the humongous economic uncertainties looming on the horizon. How can investors understand what is going on and prepare for what's to come? The latest earnings reports from the big technology companies may serve as a good sign post for investors planning for the future.

Greed Dominating Fear

According to Warren Buffett, there is a simple investing rule that applies almost all situations: "be greedy when others are fearful, be fearful when others are greedy." And today, all evidence seems to suggest that the stock market is being dominated by greed. For example, the number of searches related to stocks is more than 2x higher than it has ever been before. In fact, ValueChampion's own website has seen consumer interest in investment platforms like online brokerages and robo advisors increase by 2-3 fold in the past few months compared to the previous periods.

In other words, there is more consumer interest in investing right now than ever before. As COVID-19 began wreaking havoc all over the world and the stock market began to collapse in March, retail investors flocked into the market and drove the stock prices back up to their record highs. This frenzied purchase of stocks by retail investors has been well documented. In fact, so many people are now investing that I have a hard time finding someone who doesn't own stocks anymore. If fear means "unwillingness to invest due to concerns of potential losses," there certainly seems to be a dearth of it today.

What Do the Latest Tech Earnings Mean for the Market?

Leading technology companies' latest earnings reports seem to be confirming this. Already, 3 of the most favored technology companies during the pandemic, including Microsoft, Netflix and Tesla, have seen their stocks slide after reporting record level results. Microsoft, whose stock has soared by more than 30% YTD to a valuation of about $1.6 trillion, handsomely beat Wall Street estimates by 7% this past week, only to see its stock price actually decline by 4-5%. Similarly, Tesla, whose stock has quadrupled this year, blew out Wall Street estimates last week, only to see its stock decline by 10%. In a normal market, it would not have been unusual to see such big beats send their stocks flying by 10-20%. Given these negative reactions by the market, it's clear that stock prices are no longer closely connected to actual performance of companies, and that investor greed & expectations may be excessively high.

Latest Earnings Result: MSFT & TSLA

Are Tech Companies Completely COVID Proof?

Netflix and Microsoft's earnings were particularly interesting because they seem suggest that the tailwind of the stay-at-home economy may be losing its momentum. After 2 quarters of very strong performance, Netflix and Microsoft both provided guidance that showed a dramatic deceleration in their growth. This suggests that their growth acceleration that was caused by the pandemic may have been a result of pulled forward growth opportunities from the future, and that even tech companies are starting to see the impact of the overall economic slowdown caused by the pandemic. Afterall, will consumer spending really increase even while a significant portion of the population remain unemployed? And in such a scenario, will businesses, including Microsoft's clients, really continue to hire, get new clients and increase their expenditures as pandemic ensues for another 6-12 months?

Guidance Suggesting Rapid Deceleration: NFLX & MSFT

Patience & Dry Powder

True, market bubbles can last for a very long time as seen in the 1990's internet bubble era. However, we may already be seeing signs that even the biggest beneficiaries of the pandemic are starting to underperform investors' sky high expectations, and that investor sentiment is separated from economic realities. If COVID-19 persists for another 6-12 months, which seems very likely now, and if even tech companies begin to slow down their growth, ebullient investors will be in for a rude awakening. Therefore, we recommend investors to be patient and conserve dry powder they can deploy when fear overtakes the market. If you still want to participate in the market, then at the very least employing a conservative approach to investing like dollar cost averaging might be a good way to tip your toe in the water in these turbulent times.