Alphabet And Microsoft Bring Technology Momentum Back — Will It Last?

Strong earnings from Alphabet and Microsoft brought momentum for technology shares back on Wall Street at the end of last week. This helped U.S. stocks shake off stagflation worries and close with solid gains.

The S&P 500 closed at 5,099.96, up 2.70% for the week; the Dow Jones at 38,239.66, up 0.70%; the tech-heavy Nasdaq at 15,927.90, up 4.2%%.

That's a significant turnaround from last week, when the S&P 500 was down 1.90% and the tech-heavy Nasdaq down 3.8%.

Stocks came under pressure that week due to mixed inflation numbers that reinforced Wall Street analysts' narrative of higher interest rates for longer. Then came Netflix's earnings report, which failed to meet the bullish expectations of the tech sector's momentum crowd.

Still, the turnaround from one week to another could have been smoother.

For instance, stocks sold off Thursday following another dose of disappointing tech sector earnings. This time around, Meta, the parent company of Facebook, failed to meet the hyped expectations of the tech momentum crowd.

The Gross Domestic Product (GDP) report added to the selling pressure from Meta earnings. It showed that GDP expanded by an annualized 1.6% in the first quarter of 2024, down from 3.4% in the previous quarter and well below forecasts of 2.5%.

The first quarter mark-down in the nation's output was the second consecutive slow-down since the contractions in the first half of 2022.

Meanwhile, the price index for personal consumption expenditures (PCE) climbed at an annual rate of 3.4% in the first quarter of 2024, up from a 1.8% increase in the previous three-month period, according to the U.S. Bureau of Economic Analysis.

The combination of slower GDP growth and higher prices brought back another narrative on Wall Street: stagflation. This situation puts the Fed in a bind, as it must simultaneously address policy targets.

That's worrisome news for every asset category, from Bitcoin to bonds and equities. Thus, the sell-off seen in Thursday's early morning trade, with Bitcoin down 2.76% for the day, the S&P 500 down 1.46% for the day, the Dow Jones down 1.78%, and the tech-heavy Nasdaq down 1.87%.

But the stars began lining up for Wall Street bulls, especially for the tech momentum crowd, on Thursday afternoon, following the release of earnings from Alphabet and Microsoft. They both beat top and bottom-line expectations nicely, bringing back the tech sector momentum in Friday's trading session.

"This quarter was a class act from Google, and it's likely to win over many skeptics," Tejas Dessai, Research Analyst, Global X, told International Business Times. "The print speaks to the quality of the underlying business and the diverse levers at Google's disposal. The business is firing on all cylinders with an aggregate 15% YoY top-line growth. Top-line and healthy revenue beat momentum should also help alleviate concerns emerging from Meta's earlier print that we may be entering a slowing advertising market."

The quarter was likely to win many skeptics for Microsoft, too, which has been riding high on the tailwinds of the AI revolution. "We're in a strong corporate spending environment, as businesses prioritize AI-related investments, which favors a wide range of products and verticals that Microsoft operates in," Dessai said.

"Continued reacceleration in Azure cloud growth shows AI-as-a-service is continuing to become a growing mix of the revenue base," he added.

Still, more high-profile earnings will come next week, with both Amazon and Apple reporting and the FOMC meeting on deck.

Arnim Holzer, Global Macro Strategist @ Easterly EAB Risk Solutions, thinks the market's focus has moved from "we need interest rate relief" to "we are going to grow earnings into these multiples." However, he believes getting the environmental driver call right is much more important than the short-term tactical one.

A private investment expert, Matt Willer, sees every asset class as a tug of war when digesting uncertain and sometimes conflicting data. "The Market ran up in anticipation that rate cuts were imminent; now we see defacto signals inflation isn't entirely under control, and we then saw a weaker-than-expected GDP. Bonds spiked as the defensive play, then gave way to equities after some strong earnings, and Bitcoin has generally been in a holding pattern in the hemisphere of all-time highs," he said.

Willer expects a push and pull until we get good economic visibility. "It's also an election year, and two wars are happening, adding to the murkiness," he added.