S&P 500 and Dow drift below record levels, Microsoft jumps

Michael Arone, State Street Global Advisors US SPDR Business Chief Investment Strategist joins the Yahoo Finance Live panel to discuss the latest market action.

Video transcript

ZACK GUZMAN: Some big moves to spotlight in tech. Of course, we got the updates from Microsoft and Google. We'll start here with just highlighting some of the moves from Microsoft, given the beats that we saw. Not only a beat on the top line and the bottom line, but pretty much everywhere at that company. As we highlighted last hour, big pop from LinkedIn sales activity as more employers look to get employees back into the roles they have to offer there, as well as a beat from its cloud division. $16.98 billion, that topped what the Street was expecting at about 16.5.

And even its PC shipments coming in despite a slowdown, they beat expectations that Wall Street had there, too. We can go through all the other numbers here among the tech players, Akiko, but I want to bring in a voice here to get us started in the noon hour because I try to tie this back to where we are in terms of wrapping up 2021.

And for more on that, I want to bring on Michael Arone, State Street Global Advisors US SPDR business chief investment strategist here. And Michael, I mean, Microsoft just one to kind of point to here. You can go through Google also seeing a nice pop in the session. We can get into the laggards later, but I mean, what are you seeing in terms of these tech earnings and the rest of earnings season as Alphabet hits a session high, an intraday high here? Talk to me about what you're seeing.

MICHAEL ARONE: So Zack, it's been clear that investors have been able to ignore a lot of the risks in the market largely because the earnings have been so good. Revenue growth, earnings per share growth. Even profit margins, where there was a lot of anxiety that they would begin to be impacted by supply chain bottlenecks and rising input costs, have also stayed healthy. And so investors have largely ignored some of the risks out there.

Now, I do think there continues to be this disconnect between Main Street and Wall Street. And what I mean by that is tomorrow's GDP figure is going to be disappointing, particularly when we compare it to the second quarter. Growth has slowed largely due to the delta variant surge, the continued challenges on the supply chain, and those labor shortages. But here's the thing. I think going forward, I think that some of those challenges will improve beginning as early as the fourth quarter. And you might actually start to see economic data beat muted expectations. So that I think is something to look forward to in the fourth quarter and the beginning of next year.

AKIKO FUJITA: So why do you think we're seeing this divide? I mean, is this just about the market being more forward-looking than what it is we're seeing right now? Because, you know, yesterday, we were talking about new highs for the Dow and the S&P 500.

MICHAEL ARONE: I think that's largely, Akiko, in that investors are seeing this incredible earnings results and the fact that profit margins have stayed healthy. I also think that this disconnect is largely driven by still very easy monetary policy. So low rates definitely boost valuations north of where they would normally be. Combine that with a lot of the liquidity flowing around and a Fed that continues to remain accommodative.

Now, again, we'll look to next week to see if that begins to shift as well. But overall, that sets up for this kind of inflation in asset prices. Yet, some of the things that I mentioned in terms of the delta surge, the supply chain challenges, the labor shortages, are certainly having some impact on the economic data. Now, to your point, I think that investors are forward looking. And they are beginning to realize that we might be at the peak of some of those challenges, and they will improve.

So what's interesting here is, now, markets will begin to evolve on shifting expectations, not necessarily the data outcomes. And so, if, in fact, they are getting a bit too optimistic on both the economy and earnings, and we get some disappointments, that could be a challenge going forward.

ZACK GUZMAN: This almost sounds uncouth to ask, as we have Alphabet at a record high here, but when we talk about the growth engine for, I guess, broader market moves here as we continue to move further and further along in earnings season, we were talking yesterday on the show with another guest about value stocks and kind of how they had led and then, you know, fell behind here as tech took off again. I mean, when we talk about maybe some of the issues that some of these companies-- you can look at Twitter today maybe as an example here, but that might have more to do with user growth rather than ad spend.

But you can look at Alphabet's own YouTube numbers coming in softer than expected, too, that some of these companies that had been kind of detached from some of the underlying economic fundamentals are maybe now starting to see some pandemic effects as people stop streaming, stop spending more time online. I mean, is there some truth maybe behind some of these value names to open up and become the leaders yet again as we move forward?

MICHAEL ARONE: So I think my thesis kind of proves out in that you do see a rebound in the economy. You see a resurgence after a temporary setback brought on by the delta surge and the supply chain and the labor shortages. So if, in fact, you start to see an economic rebound, Zack, I do think that that lends itself to both cyclical value sectors of the market doing well as interest rates climb, as inflation stays around a little bit longer than anticipated. Even Federal Reserve Chairman Powell has suggested that this has lasted longer and been a bit more prevalent than he would have thought going on earlier this year.

So as that starts to play out, if this thesis comes to fruition, I do think those cyclical value sectors will continue to perform well, your energy, your financials, your materials, your industrials, particularly as the economy rebounds and perhaps beats expectations.

ZACK GUZMAN: We'll see how that goes, at least for today. Some of those tech names enjoying some new records, Alphabet being the main one we're keeping our eyes on. Michael Arone, State Street Global Advisors US SPDR business chief investment strategist, thanks again for the time.