A strong dose of computer and internet earnings woke tech stocks from a moribund week, sending the Nasdaq 100 Index to its best performance in seven years relative to the broader market and putting fears of a FANG rout to bed, at least for a day.
Google parent Alphabet Inc. jumped 6.4 per cent as of 10:40 a.m. in New York, and Amazon.com Inc. surged 11 per cent as bottom-line profits wiped out analyst forecasts. Microsoft Corp. joined the rally, climbing 8 per cent as its sales and income breezed past the Wall Street consensus.
It was welcome news for bulls who'd watched the celebrated FANG group decline in six of the last eight days as options traders piled into protective bets and braced for volatility. The buoyant earnings reaffirmed tech's leadership and helped assuage concerns about valuations in the broader market, by some measures the highest since the dot-com bubble.
"We saw some weakness in the stocks of tech megacaps recently, not so much because of a concern about mediocre earnings but rather because a concern about valuations being stretched," said Walter Todd, chief investment officer at Greenwood Capital Associates. "The numbers Google and Amazon reported may trigger a rotation back into tech megacaps and probably a further rally. "
About $150 billion were added to the market value of Nasdaq 100 companies as the gauge jumped 2.2 per cent. The advance in the tech-heavy measure compared with a 0.5-per-cent increase in the S&P 500, on course for the widest outperformance since October 2010.
Google and Amazon build on an earnings season that so far has been almost unilaterally strong for the tech industry. While the rest of the market struggles with uneven results, technology firms have mostly skirted the volatility. Among companies in the industry that have reported, 94 per cent exceeded analyst estimates, data compiled by Bloomberg show, with stocks climbing an average of 0.8 per cent on the first day after the announcement, better than any other group except for materials.
Before Thursday's reporting, anxiety had been building as investors worried the market's biggest driver would lose steam should earnings disappoint. U.S. tech companies have added more than $1 trillion in equity value this year, with gains from the five biggest accounting for one-third of the S&P 500's advance at various times. Up 40 percent year to date, the top tech firms traded at a valuation that's about six times the S&P 500.
Traders turned to options to protection, pushing the cost of hedging against losses from the Technology Select Sector SPDR Fund to the second highest among ETFs focused on major industry groups, data compiled by Bloomberg show.
Rather than blowing up, Amazon demonstrated to investors that it can run grocery stores, churn out gadgets, expand its cloud-computing business and invest in new markets, all while selling more products online and managing expenses.
A surge in Google ad volume helped the web-search giant shrug off concerns about regulatory scrutiny and an expensive foray into hardware. At Microsoft, its push into the cloud paid off, with demand for online versions of Office productivity software and the Azure web-services business bolstering sales and earnings.
To be sure, the performance followed months of analyst downgrades, suggesting a lowered bar for these companies to exceed. Still, better-than-expected results showed the worst worries were overblown and bulls were validated after piling more money into tech ETFs than any other group this year.
"Anytime there's any kind of a beat, even if expectations had come down during the quarter and then the lowered expectations are beaten, it's just a reason for party on and momentum investors to keep buying and these things to really go to the moot," said Brian Frank, portfolio manager at Key Biscayne, Fla.-based Frank Capital Partners LLC. "They don't make any sense for a fundamental value guy like me, but for a momentum person absolutely. Beat and raise and the stock goes up -- it's a great game."