Fra BNP Paribas
- Tech underperforming despite earnings beat: In Q2, we saw positive correlation between sector earnings beat/miss and returns (Chart 1). However, so far for Q3, we do not see the same pattern. As shown in Chart 2, in spite of a +9.6% earnings beat, tech sector is underperforming, posting a -8.3% return since the start of October.
- Forward looking caution: One reason for the negative equity price action is that many companies are giving more bearish forward guidance. As we already flagged in our Earnings note, wage growth, input price inflation, and the fading tailwind from tax cuts, along with negative impacts from global trade tensions, will make 2019 a much more challenging year for US corporate earnings.
- GOOG & AMZN not XLK components: GOOG & AMZN both reported earnings yesterday and opened lower till this morning. However, it is worth noting that neither are in the GICS tech sector, although both are in the NDX. As such impact QQQ, but does not directly XLK.
- Positioning on near-term tech rebound: The beat/miss ratio for tech is amongst the best for any sector this quarter. If we see a short term bounce in the market, we would expect to see tech outperform. Currently, there are still 40 out of 66 tech companies left to announce earnings. For those looking for a near-term rebound of tech, it may worth considering being long XLK call spreads, which offers a potential max payout to premium ratio of 3.6x if the spot comes back to levels from the start of the month.