The U.S. stock market is composed of thousands of stocks. Of course, when it comes to moving the overall market, some stocks matter more than others. The biggest stocks, those in the S&P 500, and those in the Fortune 500, have some of the biggest impacts on the overall stock indexes. However, in most cases, the news that comes out of those companies is relatively expected.
The exception to this rule are the technology companies. Unlike, say oil companies, or big manufacturing companies, it isn’t always easy to use the economic information surrounding them to accurately predict what will happen, especially when it comes to earnings reports. And, with those same companies forgoing the usual “guidance” that other companies provide, what happens in tech company earnings can be a true market moving surprise.
This week saw a negative report from industry titan IBM. IBM is not only a household name technology company, but it is also the second highest weighted component in the Dow Jones Industrial Average, commonly referred to as The Dow. The company itself is down over 5 percent so far today, and the Dow is down over 1 percent, or more than 150 points. (Also dragging on the Dow is United Technologies, which, is actually not a tech company.)
The interesting part comes tonight after the closing bell when perhaps the most watched of all technology companies, Apple, reports their earnings. Microsoft and Yahoo report earnings tonight as well.
What gets interesting is that with IBM’s report disappointing, there is cause to believe that maybe other tech companies will disappoint as well. Indeed, all three of the above are currently trading down. If tonight’s reports are all negative (or at least not as positive as Wall Street would like), you can expect a pretty major rout in the markets tomorrow. On the other hand, if all three come in decent, then you can expect a pretty major recovery with everyone assuming that the industry is fine, and IBM was just the only one with a bad quarter.
If they are mixed, that’s where it gets really tricky.
The reality is that as Apple goes, so goes the tech market, at least when the direction is down. A bad report from Apple sends the markets down, no matter how well Microsoft and Yahoo do. However, a good report from Apple, coupled with just one other good report is enough to pull things up.
If the mix comes in good for Apple, but the other two down, then you can expect the broader tech market to end up down, while Apple itself rises. The idea here will be that Apple is a good company, but tech in general is currently in trouble.
The good news is that expectations for Yahoo are low, so even if it comes in weak, that can still be fine as far as Wall Street is concerned. So, basically, what the stock market looks like tomorrow all comes down to Apple. The company offers almost no guidance, so everyone expects essentially more of the same. If that happens, fire up your sunshine playlist. If not, break out that emo playlist you haven’t used in a while.
As always, long-term investors need not concern themselves with these relatively volatile short-term stock price movements. However, heeding that advice is often easier when one knows what is coming, and why the behavior works like that.