Market recap: Tuesday, Oct. 26

Darren Schuringa, ASYMmetric ETFs CEO, and David Bahnsen, The Bahnsen Group CIO, join Yahoo Finance to break down the day of trading and discuss takeaways from the latest earnings reporrts.

Video transcript

ADAM SHAPIRO: OK, a minute and a half until the closing bell. Helping us figure this all out, Darren Schuringa, Asymmetric ETF CEO, along with David Bahnsen, the Bahnsen Group CIO. Before we actually head there, let me just start with you, Darren, because a lot of people are talking about these markets being expensive. What do you think? Because we talked about it last hour-- expected earnings are growing, and prices for stocks seem to be falling a bit in line with that, means the market isn't as expensive as some people may fear.

DARREN SCHURINGA: It's really more of a question of looking forward, correct? You look at the market, we've been in, what, the longest bull market run in history right now. The law of small numbers, we've had great earnings growth coming out of a global pandemic, and things are just going to get more difficult. Comps are going to be more difficult going forward. And you sort of heard that from the earnings preview just a minute ago.

So I think stocks on a relative basis, you start looking forward, are going to be a little more expensive. Earnings growth is going to slow. And investors are going to get a little more picky going forward.

ADAM SHAPIRO: Picky might be a good thing. All right, let's take a quick breather and check out where we are headed as we get ready for the closing bell. Dow holding on to some of its gains-- 23 points. S&P 500 about 9 points, NASDAQ up about 10 points. We're going to get those big earnings from Microsoft, Robinhood, Alphabet all after the closing bell. But right now, let's take a deep breath and get ready, because here it is.

[BELL RINGING]

SEANA SMITH: And that does it for today's trading day. Take a look at where things ended-- the Dow barely holding onto gains, closing up well off its highs of the day after touching a record intraday high. You can see it closing up just 14 points. S&P up around 2/10 of a percent, the NASDAQ also barely holding on to gains. In terms of the sector action, it makes a lot of sense when you take a look at the laggards here today-- communication services among the worst performers in the market today, a lot of that having to do with the drop that we saw in Facebook.

We saw Facebook shares reverse right around midday. So that helped keep some of today's gains in check. Also, industrials closing in the red. On the flip side, the outperformance health care, real estate, and utilities-- and like Adam was just mentioning, we have a number of big earnings reports for you here over the next several minutes-- Microsoft, Google, Twitter, Robinhood, AMD all set to report. So we, of course, will bring you those results as soon as they cross.

But we want to bring back in our panel. We have Darren Schuringa and David Bahnsen here to help us break down the action. And, David, we just heard what Darren thought about where things stand today. I guess, what's your consensus? We're, what, two weeks, a week and a half into earnings season right now. The earnings actually look pretty strong. Is this momentum going to continue?

DAVID BAHNSEN: Well, I think the issue is top line sales growth going forward. The earnings have continued to grow as top line has expanded and margins have held up quite nicely. The margin expansion, not just post-COVID, but really years, a very impressive ability out of corporate America to drive profit margins wider. The sustainability there, I think, becomes more difficult, and therefore you become more reliant on top line revenue growth.

And revenue growth is going to require some overall economic strength. And I completely agree with what he said. It would be more selective. It will not be a matter of broad index levels driving all of this, but there's going to be winners and there's going to be losers. And that will be more, I think, exaggerated than it's been in the recent past.

ADAM SHAPIRO: David, let me ask you this, because we've seen oil trade at prices that we haven't seen in almost six years. That's going to be a hit when it comes to revenue, or we going to get those expenses passed on to us from companies?

DAVID BAHNSEN: Well, it depends on what the sector is. For the energy sector, we're heavily overweighted. Of course they're the recipient of those higher revenues. For those that it's an input cost, it could very well cut into margins. But of course, a lot of those companies have for years now been spending gabs of money on hedging and sort of controlling the impact of unexpected price movements.

And you also have to remember that they were so used to very, very low prices for much of the last 12 to 18 months before this most recent move higher, I'm not sure-- there are plenty of price inputs out there that are cutting into margins. I'm not sure oil is one of them.

ADAM SHAPIRO: Darren, what do you see as potential hiccup as we go forward?

DARREN SCHURINGA: I think that commodity prices are a potential hiccup. I think inflation going forward is more real than transitory. And that's going to provide some headwinds to the market as we move forward. I think looking at oil not so much as compressing margins, although I do think it will have a role to play, but from top line growth looked at the consumer.

It's going to be more expensive at the pumps to fill up your car. Is going to be more expensive to heat your home this winter. So for a consumer-driven economy, that is certainly going to be a headwind to top line growth and revenue growth from corporations that are looking for it if you're not getting margin expansion. I would argue you're probably going to start to see a little bit of margin contraction, given the inflationary pressures we're seeing throughout the supply chain.

ADAM SHAPIRO: All right, gang, take a breather, because Seana's got Microsoft earnings for us.

SEANA SMITH: Hey there, Adam. I was just digging through some of these numbers. So we're seeing Microsoft shares move us slightly higher here after hours, up just around 7/10 of a percent, so not a huge move to the upside. The numbers actually look pretty solid-- adjusted earnings per share coming in at $2.27, revenue coming in at $45.3 billion. The estimate from the Street was for $43.94 billion.

Intelligent cloud-- we know that that was one of the key things that investors were going to be watching during this earnings report. And we know that's key here to Microsoft's future growth. That came in at $16.96 billion for the quarter. The estimate was for $16.58 billion. PC revenue, there were some concerns about how big of a hit this sector or this division could potentially take because of some of those chip issues, but revenue for PCs coming in at $13.31 billion. The estimate from the Street was for about $12.68 billion. So a beat there, so pretty solid results from Microsoft-- and the stock not having too much of a reaction here after hours, up just around 6/10 of a percent, Adam.

ADAM SHAPIRO: All right, let's get some reaction from our panel. I want to go back to David. I noticed that in the stock picks that you sent us, you talked about oil. I know that you've got Merck in there and you've also got JPMorgan Chase. But are you avoiding tech? Are you avoiding the Microsofts of the world? Or you just like something else?

DAVID BAHNSEN: Well, it's not that we're avoiding it. There's a great deal of tech that's totally off our screen because we're dividend growth investors. And many of these companies refuse to return capital to shareholders via dividend. They will wait until they can blow ungodly amounts of capital through silly transactions, and so they're not on our screen.

But history plays out over, and over, and over again-- these companies grow up, and then they become dividend payers, and, in fact, dividend growers, and then that's when we like to buy them. In the case of Microsoft, after the tax rate changed in 2003, and magically after Bill Gates retired, all of a sudden they became a great dividend payer and dividend grower.

But the valuation outgrew even their dividend growth. And so we no longer hold a position in Microsoft. So our take on tech is like on anything else-- that we want bottom-up companies that have great free cash flow generation and are sharing an increasing amount of that free cash flow with us, the shareholders.

SEANA SMITH: Well, let's stick with tech, because we just got results out from Alphabet. Emily McCormick has that for us. Emily.

EMILY MCCORMICK: Well, Seana, we're taking a look at shares of Alphabet fluctuating in late trading. They are up slightly as we speak now. And that's after the company posted third quarter results that topped consensus expectations. Now, on the top line, we had revenue, excluding traffic acquisition costs, growing 41% over last year to reach $53.6 billion. The estimate on Wall Street was for $52.6 billion.

And then if we take a look at the bottom line, earnings per share coming out to $27.99 versus the $23.50 expected-- so a pretty big beat there on the bottom line and on profitability here for Alphabet. But if we take a look beneath the surface, a little bit of weakness when we take a look at some of these individual segments-- Google Cloud revenue coming in at $4.99 billion. That was up 7.8% over last quarter, but slightly below estimates for $5.4 billion.

And of course, Wall Street is always seeing how that unit does in particular, since it is a competitor to Amazon Web Services and Microsoft Azure, which are both still larger than Google's cloud services at this point. And then also taking a look here at Google's services revenue-- that does include Google's main search advertising business as well. That did grow 4.9% quarter-over-quarter to reach $59.88 billion, slightly ahead of estimates.

But again, guys, some really strong results here when we take a look just at those top line third quarter revenue excluding traffic acquisition costs as well as earnings per share. And that stock is moving slightly to the upside in late trading.

ADAM SHAPIRO: Emily, can you just once again give us the total revenue number and how much that was up year-over-year?

EMILY MCCORMICK: Absolutely. So revenue excluding traffic acquisition costs for Alphabet was at $53.62 billion, up 41% over last year. And again, that metric does exclude the cost that Google actually pays to feature Google search as one of those main search engines. So when you strip out the traffic acquisition costs, again, that up 41% over last year Adam.

ADAM SHAPIRO: Emily, thank you. Darren, I realize that your space is ETFs, but when you hear a revenue number like that-- and, of course, 2020 in so many ways is an anomaly, and I look forward to when we no longer have to compare to it-- but what's your reaction? It seems as if there's no stopping Alphabet. I know other companies are blaming Apple because of the IDFA stuff, but what are your thoughts?

DARREN SCHURINGA: Impressive growth. I think it really goes to my earlier point that you're looking at a law of small numbers. Coming out of last year, you had a global pandemic, so the comps are really easy. And that's generally what happens is you get into your early stages of a recovery. Now, we're getting into our mid to late stages of a recovery-- so some more difficult comparisons.

What I think is interesting listening to the earnings result was good top line revenue growth, and Google does here have a consumer component to it. So it's a good indication of the strength of the consumer. The consumer numbers, and the advertising, the cyclical recovery did seem to hold up there from a decent level on a quarter-over-quarter basis. So looking at the broader economy and reading the tea leaves of Google to sort of understand the macro trends, that looks pretty good.

ADAM SHAPIRO: We appreciate you both being here-- Darren Schuringa is Asymmetric ETF CEO, and David Bahnsen the Bahnsen Group CIO. And, David, I should have pointed out in the introduction that you're one of Barron's top advisors in the United States. So again, we appreciate both of you joining us with your insights.