Software Stocks Are Next Risk Point For Traders

Cloud-stock earnings are the next short-term risk point for a market already under siege by bears. A handful of key companies will report the next few days, including Zscaler ZS , Box Inc. BOX , Veeva Systems, Splunk, Snowflake, Okta and CrowdStrike CRWD . For all these companies, sales growth according to analyst expectations has peaked for the foreseeable future. Salesforce CRM kicked things off with a rocky start, slipping 6% after-hours on Tuesday despite beating expectations and holding firm on guidance. Tough crowd, especially when you consider the shares had already dropped 4% in Tuesday’s session.

It’s important to point out that software stocks had been under pressure for three weeks prior to news of the Omicron variant. It’s even more important to understand that this group is just one of many sectors that was under pressure prior to the latest virus news. Payment stocks peaked in August, airlines have been on the brink of technical breakdown since spring, flashy future tech funds are back on this year’s lows – the list goes on.

The latest Covid mutation is complicating the near-term economic outlook, but performance in the stock market’s been lackluster since the number of companies making 52-week highs peaked in October. There is certainly an argument that investors should recalculate reopening trends based on Omicron, but the defining characteristic of the economy right now – and thus the most important factor for the market – is still the tradeoff between the recovery and the inflation and policy changes it produces.

Cloud stocks are at risk in this scenario. Mostly because their lauded total addressable markets were pushed forward dramatically by the remote work demands of Covid life. Morgan Stanley MS analysts had this on their mind when downgrading CrowdStrike earlier this month, saying the cybersecurity firm will face challenges to its pricing power going forward. It makes logical sense that pricing power for cloud companies will decline post-Covid, as the urgency of demand declines. On top of that, a bevy of tech IPOs and SPACs last year means these stocks will also be competing for the flow of investment dollars.

Investors for a long time grew accustomed to paying up for growth at any cost for these stocks, but appetite for that approach is waning lately against the specter of tighter monetary policy, and real economic growth that could favor traditional cyclical companies more directly.

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Salesforce’s 10% drop in Wednesday’s action – despite more virus news that in the past has been a positive catalyst for tech stocks – is an important indicator for the Nasdaq’s NDAQ capacity to find its legs at this particular juncture. Don’t be surprised if it remain wobbly.

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