If you want to know why the S&P 500 didn't move even higher than it did today, look no further than Alphabet Inc. (GOOGL) – the parent company of Google – which accounts for more than 3% of the index.
The company reported its quarterly earnings on Monday after the closing bell, and the numbers were ugly. Alphabet missed revenue expectations by a full $1.02 billion and earnings expectations by $0.41 per share – coming in at $36.34 billion and $9.50 per share, respectively.
The company did manage to beat its Non-GAAP earnings estimates of $11.90 per share by $1.74 per share, but traders didn't seem to care. They were too focused on the revenue flop.
Most of Alphabet's revenue – 84.5% to be exact – comes from advertising. Because it is such a crucial part of the company's business, traders watch advertising sales growth like a hawk and tend to get panicky when growth rates slow down, like they did last quarter.
Advertising sales growth has been slowing for the past year, but Q1 2019 saw the fastest decline. Here are the numbers for the past five quarters:
- Q1 2018: 24.4% growth
- Q2 2018: 23.9% growth
- Q3 2018: 20.3% growth
- Q4 2018: 19.9% growth
- Q1 2019: 15.3% growth
As you can see, Q4 2018 was the first time in a while that growth fell below 20%, and the 15.3% growth rate in Q1 2019 is utterly disappointing compared to what it has been in the past.
As you can see in the five-minute chart below, traders crushed Alphabet stock in after-hours trading (the yellow-shaded section) on Monday when they heard the news. It only took the bears 10 minutes from 4:00 p.m. to 4:10 p.m. EDT to push the stock from an after-hours high of $1,297 to $1,236, and things only got worse from there. This one-day decline is the worst for Alphabet stock since 2008.
The S&P 500 closed at a new all-time high for the second day in a row today. Thanks to the disaster that was Alphabet stock today, the index wasn't able to add much to yesterday's gains, but it was able to climb 0.1% to close at 2,945.83.
Amazingly, Alphabet wasn't the S&P 500's worst performer today. Diamond Offshore Drilling, Inc. (DO) took home that honor by dropping another 9.42% today in the wake of yesterday's earnings-induced losses. It appears traders are still concerned that crude oil prices aren't going to rise high enough to boost earnings in the oil exploration industry.
Risk Indicators – Margin Debt
As the S&P 500 has been climbing back up to a new all-time high, I've been watching margin debt levels to see if the bullish run of 2019 was going to have as much buy-in as the bullish run of 2018. Unfortunately, it doesn't look like it does at the moment.
This doesn't mean the S&P 500 can't, or won't, climb higher. There is obviously bullish momentum in the market. Otherwise, the index wouldn't have reached a new intra-day high 2,949.52 on Monday. It simply means that traders – based on what I'm seeing in the margin debt numbers – don't seem to be as willing to increase the leverage in their portfolios today as they were in 2018.
Traders can increase the leverage in their portfolios by borrowing up to 50% of the purchase price of a stock – according to Regulation T of the Federal Reserve Board. This means, if a stock costs $100, a trader needs to invest only $50 of her own money to purchase the stock. She can borrow the other $50 from her broker. Borrowing money to buy stocks is referred to as buying on margin, and the amount of money a trader has borrowed to buy stock is called "margin debt."
I like to track the total amount of margin debt being used to buy stocks in the market to get a sense not only of how much demand there is on Wall Street but also of how confident traders are. Confident traders tend to borrow more because they know increased leverage can boost the return on their investment. Nervous traders tend to borrow less because they know increased leverage can also amplify their losses.
Margin debt rose dramatically during the bull run of 2018 – reaching an all-time high of $668,940,000,000 in May 2018 – before it started to level off in mid-2018. After bottoming out at $554,285,000,000 in December 2018, margin debt started to rebound for a few months in early 2019. However, the increase in borrowing didn't hold during March, as margin debt dropped from $581,205,000,000 in February to a level of $574,013,000,000.
Unfortunately, the Financial Industry Regulatory Authority (FINRA) releases its margin debt data one month after the fact. That's why we are just now seeing the data for March. We'll have to wait until the last week in May to see April's data.
This wasn't a huge drop, and it may end up being a short-term pullback in the middle of a longer-term uptrend, but it is worth noting. Traders are being more cautious in 2019 than they were in 2018.
Bottom Line – Earnings Giveth and Taketh Away
This earnings season has been a wild one so far. We saw Alphabet disappoint and get clobbered today, but we also saw companies like Mastercard Incorporated (MA) and Pfizer Inc. (PFE) beat expectations and gap higher.
On balance, the positive earnings surprises have been able to lift the broad market indexes, but the big misses have served as a reminder that we must be constantly vigilant with the stocks in our portfolios.
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