Photographer: Eric Thayer/Getty Images

Earnings Engine Conks Out in Nasdaq's Worst Week Since February

  • Netflix, Microsoft, Alphabet contribute most to Nasdaq's drop
  • S&P 500's rebound mirrors one it had from August-to-November

Disappointing earnings reports erased $68 billion from shares of Netflix Inc., Microsoft Corp. and Alphabet Inc. and sent the Nasdaq 100 Index to its biggest weekly drop since February.

Netflix saw its stock fall the most among the trio after rattling investors with forecasts for weakening subscriber growth overseas. The Los Gatos, California-based online video provider slid 14 percent, the largest drop since September. Concerns about a turnaround plan sent Microsoft down 7 percent while Google’s parent declined 5.4 percent on margin concerns.

The three stocks accounted for 80 percent of a 1.5 percent retreat in the Nasdaq 100, the biggest decrease since it lost 6 percent in the week ending Feb. 5. The Standard & Poor’s 500 Index added 0.5 percent.

“There was a nice run-up in many of these kind of names last year, but when you have that kind of rally you’re more likely to have a reaction to negative news,” Lisa Kopp, head of traditional investments at U.S Bank Wealth Management in Minneapolis, Minnesota, said by phone. “It does affect sentiment as people look at these.”

While earnings at S&P 500 companies are exceeding analyst estimates by 4 percent on average, the spotty results from mega-cap tech stocks are taking a toll on the broader market. The S&P 500 couldn’t hold 2,100 this week -- a level it’s crossed 40 times since the start of 2015 and a key threshold where JPMorgan Chase & Co. says more buyers could step in.

The S&P 500 couldn’t hold 2,100 in November, either, a concern for bulls worried history will repeat. Back then, it jumped 13 percent from a summer low to peak at 2,109.79 in the span of 10 weeks. This year, the benchmark’s 14 percent rally since Feb. 11 also occurred in a 10-week period.

“The S&P has gone nowhere in the past year and the market keeps running into a valuation ceiling at about 2,100,” said David Lafferty, the Boston-based chief market strategist for Natixis Global Asset Management. His firm manages $966 billion. “Every time we get to that level it sort of tops out.”

Lagging tech stocks are one of the few traits that distinguishes the current rally from the rebound last fall. The Nasdaq has added 13 percent since Feb. 11, trailing the S&P 500’s advance. That’s the opposite from the August-to-November period, when the Nasdaq index topped the S&P benchmark by 4.5 percentage points.

Signs of trouble started on Monday when Netflix said it expects to add 2 million new international customers, short of the 3.45 million average of analysts’ estimates compiled by Bloomberg.

Then came announcements from Microsoft and Alphabet, whose shares lost at least 5.4 percent on Friday. Microsoft stock dipped the most since January 2015, reversing a march toward a historic high, after the software maker reported earnings that fell short of analysts’ estimates. Disappointing profits were also to blame for Alphabet’s decline, as the company’s chief financial officer said profit margins could be under pressure by higher mobile phone use and growth in automated ads.

Earnings in other industries helped mitigate losses in the stock market. Johnson & Johnson exceeded profit expectations and Bank of America Corp. jumped 7.9 percent this week after saying it slimmed down its costs through pay cuts and employee firings. Energy producers also bolstered the S&P 500 to its weekly gain, rallying 5.2 percent as the price of crude climbed to a five-month high."

“It comes back to earnings,” said Lafferty “Earnings are up relative to expectations but are stalled and people don’t want to pay for flat earnings.”

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