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Why this Week’s FAANG Earnings Could Make or Break the Market

It’s FAANG earnings week, and given how much those mega-cap tech stocks have carried this market rally, that means you should be paying close attention.

A handful of large, well-known tech stocks have been propping up the entire market of late. And that makes this a pivotal earnings week.

The biggest week of second-quarter 2020 earnings season has arrived. Some of the market’s largest tech stocks will report results, including several of the so-called FAANGs (Facebook, Amazon, Apple, Netflix, Google). Considering how much those stocks have carried this four-month rally, this week’s FAANG earnings loom particularly large.

Amazon (AMZN), Apple (AAPL), Facebook (FB) and Google (GOOGL/GOOG) account for 35% of the total weighting of the Nasdaq 100. Add in Microsoft (MSFT) and Tesla (TSLA), both of which reported earnings last week, and that’s another 14%. Thus, those six tech companies account for basically half of the Nasdaq’s total weighting.

Lately, that’s been a good thing.

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AMZN, AAPL, FB, GOOGL and MSFT stock are up an average of 35% this year. The other 495 stocks in the broader S&P 500 are collectively down 5% in 2020. Yet, because those five stocks carry so much weight, the index is up 2% for the year, as the chart below (courtesy of FactSet, uncovered by my colleague Jacob Mintz on Monday) shows.

This chart is why this week's FAANG earnings reports are so important.

So what happens if Amazon, Apple, Facebook and Google all release disappointing Q2 results this week? That’s 35% of the Nasdaq reporting, in terms of weighting. Would a series of earnings misses send the entire stock market spiraling?

We won’t know until Thursday, which is the day all four companies are scheduled to report after Facebook pushed back its Q2 earnings release by a day while Mark Zuckerberg attends a Congressional hearing on Wednesday. The good news is that all four companies are built for these days of quarantining, social distancing and generally being at home a lot. It’s why all four have thrived, along with fellow FAANG stock Netflix (NFLX), as well as Microsoft, this year.

That said, it’s possible all the good news regarding upcoming earnings is already baked into the cake. Facebook, for example, is on track for 53% year-over-year earnings growth and 3% sales growth in its second quarter – large numbers given how big a financial hit most companies took in Q2. But given that FB stock is already up 22% in the last three months, and that shares are now trading at 31 times earnings estimates (higher than its 25 forward P/E from three months ago), Facebook’s earnings may have to be close to pristine, with no truly troubling trends or disappointing forward guidance, for the stock to continue its run.

Am I putting too much emphasis on Thursday’s round of FAANG earnings results? Perhaps. Wall Street, after all, has ignored so many catastrophes over the last few months—record unemployment, an alarming second spike in COVID-19 cases, a growing list of bankruptcies—that one quarterly earnings report would seem downright trivial by comparison. But considering how much these mega-cap stocks have meant to the current rally, their ongoing health is vitally important to the market’s well-being.

So pay close attention to the FAANG earnings on Thursday. If Amazon, Apple, Google and Facebook miss estimates—even if it’s just a couple of them—it could be a tipping point, putting an abrupt halt to this surprising, and possibly very tenuous, market rally.

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Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week.