The stock market lost its mo’ last week. The major indexes fell as previously strong social-media stocks plunged and surprised investors, who hammered the rest of the market. A rally Friday took the edge off a retreat that had reached 2% at one point. Nasdaq and small-cap stocks fell 2% to 3%.
Investors also didn’t like a much worse-than-expected report out Wednesday on first-quarter U.S. gross domestic product. GDP was up 0.2% in the period, compared to a consensus projection of 1%. But the heavy damage to stocks was caused by quarterly profit reports from Twitter (ticker: TWTR) and LinkedIn (LNKD). Twitter, down 11%, missed sales expectations, while LinkedIn, off 20%, lowered guidance for the rest of 2015.
With the market hitting all-time highs the previous week on strong earnings from “old tech” stocks such as Microsoft (MSFT), investors weren’t primed for disappointment.
The Dow Jones Industrial Average lost 56 points, or 0.3%, on the week, to 18,024.26, and the Standard & Poor’s 500 index gave back 9 to 2108.29. The Nasdaq fell 1.7%, or 87, to 5005.39 while the small-cap Russell 2000 index fell 3.1% to 1228.10.
The social-media companies’ struggle to monetize traffic starkly contrasted with the previous week’s set of good earnings from traditional tech concerns, says Peter Kenny, chief market strategist at Clearpool Group. Disappointment in U.S. growth also played a part. People can blame the strong dollar or a weak energy sector, “but the first-quarter GDP was far worse than expected,” he says.
When the Federal Reserve blamed the quarter’s softness on “transitory factors,” investor hopes evaporated that the central bank might delay a rate hike, says Joe Saluzzi, co-head of trading for Themis Trading.
According to Zacks, profits are up 4.7% for the 361 companies in the S&P 500 that have reported first-quarter results so far, but revenue is down 4.1%. Saluzzi expects a continuation of the range trading seen since last November, with the S&P 500 stuck inside 2050 to 2125. “You need something to pull it out, and it won’t be earnings,” he says, because investors know some earnings-per-share growth comes from heavy corporate share buybacks.
It remains to be seen what the crumbling of high-valuation stocks means for the rest of the market. “When you see frothy names weak, it tends to spill over [in the broad market],” says Michael Yoshikami, CEO of Destination Wealth Management, who is also looking for a continuation of choppy and range-bound trading in the near-term.
Monday will see McDonald’s (MCD) announcement of a turnaround plan. Leaks have been few on the proposal. Hedgeye analyst Howard Penney says speculation about the creation of a real-estate investment trust structure or a levering up could miss the mark. Instead, the world’s biggest restaurant chain might sell off some company-owned outlets overseas and shrink the menu. Mickey D’s needs to get “hotter, fresher, and faster.”
(Source: Barrons Online)