By Barbara Kollmeyer, MarketWatch
U.S. stocks have been approaching records again, just as a busy earnings week gets under way.
Trade and earnings optimism on Monday left the S&P /zigman2/quotes/210599714/realtime SPX +1.05% 0.6% away from a July 26 record close of 3,025.86. “A solid beat on earnings from Amazon is definitely needed to swing the S&P 500 into new highs,” says our call of the day from Peter Garnry, Saxo Bank’s head of equity strategy.
The e-commerce retailer /zigman2/quotes/210331248/composite AMZN +5.69% will report after Thursday’s closing bell /zigman2/quotes/210331248/composite AMZN +5.69% , with some worried about a strain on profits from one-day shipping costs and a slowdown in its Amazon Web Services (AWS) cloud-computing business. Increased regulatory scrutiny is also a worry.
“On the positive side AWS will most likely deliver strong growth and the advertising unit may surprise to the upside,” Garnry told clients in a note.
But, he said, Amazon shares haven’t hit a new high since the third quarter of 2018, which reflects increasing hesitation from investors about paying a 100% premium versus the overall equity market for the company.
Investor appetite for the shares, which closed Monday at $1,785.66, could ebb sooner rather than later, Garnry told MarketWatch in a follow-up chat. He advises watching for early warning signs of margin compression (when input costs rise faster that what the product earns) on AWS and slowing top line, or revenue, growth.
“I think currently Wall Street’s estimates for 2020 and 2021 top-line growth are a little bit too optimistic, because it will be increasingly difficult to grow at this rate and the competitive landscape is changing,” said Garnry.
Setting records looks like a stretch, with the Dow /zigman2/quotes/210598065/realtime DJIA +0.52% , S&P /zigman2/quotes/210599714/realtime SPX +1.05% and Nasdaq /zigman2/quotes/210598365/realtime COMP +1.71% merely inching up. In Europe, the FTSE 100 /zigman2/quotes/210598409/delayed UK:UKX +0.43% is up and the pound /zigman2/quotes/210561263/realtime/sampled GBPUSD -0.0942% is down as the government pushes on with its Brexit plan.
Our chart of the day from hedge fund Crescat Capital’s recently published quarterly letter highlights cracks it sees in the stock market. Crescat Capital notes that micro-cap stocks — via the Russell Microcap Index /zigman2/quotes/210598141/delayed XX:RUMIC +0.0031% — are down 20% relative to large-caps since September 2018.
“They tend to be domestic-oriented businesses that have correlated strongly with the overall market throughout history. The S&P 500 looks like it is poised to play catch-up,” said Kevin Smith, chief investment officer, and Tavi Costa, portfolio manager.