Will the Mag 7 be the White Knights that Save the Market?

With the way markets have declined over the last few days, everyone’s focus will now be on earnings in the US next week. 42% of the S&P 500 report and as usual, traders will be hoping that earnings beats will turn this price action around.

For several quarters now, we’ve been seeing the outperformance of the Mag 7, or at least most of them, drive the turnaround in earnings season. The companies have been delivering and living up to the task of being the White Knights of saving the market when we see price declines.

In fact, without the Mag 7, the S&P 500 still remains in an earnings recession. According to estimates, without these companies, earnings growth is expected to be -2.6% for the quarter.

On a sector level, the major contributions are set to come from tech, IT, and discretionary.

But, it’s prudent to be cautious. As we’ve been saying, these companies are priced to perfection and a miss could mean further pressure given the current sentiment. In fact, we don’t even need a miss in EPS or Revenues. Any hint of bad news could send these stocks lower. We saw that when Google reported lower YouTube ad revenue last quarter and we saw that this week when Netflix issued softer guidance and announced that they wouldn’t be reporting subscriber numbers anymore starting next year.

We’re coming to a stage where the effect of cost reductions is probably ending and the luster of AI is fading. So growth should start to normalize in tech as other companies start to see higher EPS revisions.

It's Time to be Careful

We’re now halfway down to the levels we marked off two weeks ago, with the S&P 500 closing below the 5000 mark. The Russell 2000 small cap index is now down on the year, while the Dow Jone Industrial Average is barely positive for the year.

What we’re likely seeing is profit-taking ahead of the biggest week of the quarter. Most of Big Tech reports next week and Friday brings us the PCE inflation numbers, which may come out hotter than expected.

If nothing else, we will definitely see plenty of volatility, and price action is bound to be choppy. I usually advise against trading earnings because often it’s simply a gamble and no one can say with any certainty how a stock’s price will react.

It makes sense to be careful next week, as the market still remains underhedged, and we’re in negative gamma territory which means any moves (up or down) will be magnified.

Have a great week ahead and be careful!

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None of the above is investment advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.