In recent years the market-timing bears have consistently anticipated a "sell the news" reaction to earnings reports. The logic for this argument is easy to understand. Stocks have run up, valuations are aggressive, and strong earnings have already been fully discounted.
Unfortunately for our ursine friends, it just hasn't worked very well. More often than not when a key stock does stumble on earnings there is a crowd of dip buyers lined up to jump on the "opportunity."
Microsoft (MSFT) will likely provide a good illustration of this Thursday. While it beat on both the top and bottom lines, there are concerns about some weakness in margins and the pace of growth in its cloud offerings.
MSFT stock trades with a trailing P/E of 36. The Action Alerts PLUS holding had EPS growth of just 7% for the quarter and is projected to be 15% in 2022. That isn't cheap but like the other FATMAAN stocks (Facebook (FB) , Apple (AAPL) , Tesla (TSLA) , Microsoft, Amazon (AMZN) , Alphabet (GOOGL) , Netflix (NFLX) ), it is viewed as somewhat of a safe haven to buy on weakness.
Microsoft will be an interesting battle today and should provide us with some insight into the confidence levels of the dip buyers.
Tesla also reported Wednesday night and had solid headline numbers. This stock is a totally different dynamic as there is little justification for its near-term valuation but it has tremendous momentum. After the profitable quarter Wednesday night there is a good chance it will be added to the S&P 500 and that should keep it well bid as index funds will now need to buy millions of shares.
The overall market is feeling good about earnings and European stocks also celebrated some good reports from Daimler AG (DDAIF) and several other leading names.
The market action the last couple days has been mixed with some rotational action taking place and a slight cooling in speculative trading. The Covid-19 news flow is still having no impact and hopes of another round of fiscal stimulus is providing some support.
The easy thing to do here is to predict that disaster awaits. The more productive thing to do is to keep looking for setups in individual stocks and trading them aggressively.
Keep on eye on Microsoft. If selling there accelerates and the dip buyers do not provide strong support that will be a change in character that could spread. However, as long as individual stock-picking stays strong the bulls will remain in control.