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Stocks dropped some today and are likely to fall more tomorrow, at least based on after-hours trading, following results from Microsoft (MSFT), Alphabet (GOOGL), and AMD (AMD). Overall results and guidance didn’t seem to cut it, with Google ad revenue missing the mark, AMD guidance coming weaker than expected, and Microsoft guidance being pushed weaker. This has been the story of earnings season, mostly due to how heavily the market has been skewed to more upside.

This goes back to what we have discussed over the past three weeks: the basics of volatility dispersion and the hedging flows. The flows that boosted stocks into January options expiration are gone, and now the volatility dispersion, at least over the short term, is likely to see a bit of an unwind as implied volatility in stocks melts following results, pushing up index-level volatility.

Alphabet missed advertising revenue, coming in at $65.5 billion versus estimates of $65.8 billion. I know it is a small miss, but the company also reported an operating income of $23.7 billion versus estimates of $23.8 billion. But remember, there was a lot of call delta and call gamma above the $150 level, and tomorrow, all of that gamma and delta will burn off as IV values fall, bringing stock for sale, and I think, for the most part, that is what is happening in the after hours, falling 5.5%.

AMD reported inline earnings and just slightly better on revenue. Adjusted gross margins came in at 51% versus estimates of 51.5%. But more important was first-quarter guidance that missed estimates by quite a bit, coming in at $5.4 billion at the midpoint versus estimates of $5.77 billion, which is about 6.1%, and that is just too much to miss guidance by when the stock has surged as much as it has. The stock was priced for perfection, and perfection the guidance was not.

Microsoft reported better-than-expected earnings and revenue, with each segment reporting better results. Azure grew by 30% versus estimates of 28.4% while growing by 28% in constant currency versus estimates of 26.8%. The guidance sounded okay, with intelligent cloud guiding revenue of $26 billion to $26.3 billion versus estimates of $25.85 billion. More Personal Computing guidance was $14.7 billion to $15.1 billion versus estimates of $15.3 billion, and Productivity and Business Processes revenue was $19.3 billion to $19.6 billion versus estimates of $19.6 billion. Meanwhile, Azure growth is expected to remain stable. The stock is flat, but again, this could be a case of good not being good enough.

The fun continues tomorrow with ADP at 8:15 AM, the Treasury quarterly refunding announcement at 8:30 AM, where we find out the distribution of all the debt the government will issue, and is topped with the FOMC and Jay Powell press conference starting at 2 PM. 

Stay tuned…

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