Wednesday's Market Minute: Dawn Of A New Earnings Era

Netflix Inc. NFLX earnings are a good example of why Nasdaq valuations are likely peaking. Shares plunged 13% overnight, erasing five months of an arduous climb to all-time records in an instant. Earnings and cash flow surged from a year ago, but that’s not what traders care about. After a huge year, the company reported the slowest first-quarter growth since 2013 and said they’d add just 1 million new subscribers next quarter to their existing base of 208 million paid users.

The disappointing outlook and brutal response in the stock may well be the blueprint for quarantine tech trades in this upcoming earnings season. It’s just going to be impossible to sustain the degree of growth these companies saw during the extreme circumstances of a year-long global lockdown. The demand for at-home work and entertainment equipment and services enabled products like Peloton PTON and Zoom ZM to prove themselves and provided incredible cash flow and bottom-line stability to cloud companies and tech innovators.

Quarantine was a total tail-risk, once-in-a-lifetime event, but it’s crucial to remember that it largely functioned to pull forward demand for already-trending businesses. The cutting-edge companies that thrived the past year were already the ones disrupting and building the high-tech future that’s been the basis for much of the decade-long run in the Nasdaq. Most of these companies were already stock market leaders, and already expensive by many standards. Quarantine forced anyone who was not on board with these trends already to get on board, and that leaves a much shallower growth path ahead. Stock multiples on growth companies go up when growth is hard to find.

Last year, growth was non-existent, except for in these businesses. It stands to reason the spread between the growth in the broader economy and these quarantine businesses will never be wider than it was in the worst of the COVID crisis; it follows that the price paid for them will never be the same. With real economic growth starting up, the tech sector is likely to no longer be the star-child of earnings season. Instead, watch for banks, industrials and healthcare companies to thrive as life returns to normal.