Janice R. Andrews
Disappointing results at the start of the megacap earnings season served as a harsh reality check for Wall Street, raising doubts about the exaggerated euphoria around artificial intelligence (AI), which has been driving the bull market. The S&P 500 had its worst day since December 2022 as a result of a huge selloff in large tech firms, capping the longest period without a 2% decline since the beginning of the global financial crisis. The losses on the Nasdaq 100 were significantly worse, falling more than 3.5%.
After exceeding analysts’ estimates and increasing investment on its AI programs, Alphabet Inc. suffered a 5% decrease. Following a missed earnings and setbacks with its Robotaxi project, Tesla Inc. saw a 12% decline in its stock price.
S&P 500 Snaps Longest Run of Not Falling by 2% Since 2007
According to Peter Boockvar of The Boock Report, “investors are finally waking up to all that AI spend and realizing it is much more of an expense right now rather than a revenue generator.”
The session brought to light the “concentration risk” that bears have warned about, given that the market’s upward movement has been disproportionately driven by a small number of large gainers. Smaller firms beat bigger ones for the fourth straight session and the ninth time in eleven days, suggesting a change in investor preferences away from megacap tech giants that dominate benchmark indexes.
Fed Rate Bets and the Treasury Curve
Bets that the Federal Reserve is getting close to cutting rates caused the Treasury curve to steepen. William Dudley, the former president of the New York Fed, pushed for cheaper borrowing prices, ideally at the next Fed meeting. Such a move would raise concerns for many experts, since it may indicate that government are scrambling to prevent a recession.
In response to rate cuts, the Bank of Canada devalued the loonie by emphasizing “downside risks.” As carry trades unwound, the yen rose to its highest level since May.
Concerns About the AI Bubble
Steve Clayton of Hargreaves Lansdown hinted that this year would be the one when the markets talk about the “So-So Seven,” citing the fact that Tesla and Alphabet’s performance isn’t good enough to keep them moving forward. The market is not thrilled with the start of earnings season for the giant tech firms, according to Kathleen Brooks, research director at XTB. These findings were highly anticipated, and we don’t believe they provide definitive answers to concerns over the efficacy and future financial viability of artificial intelligence (AI).
Tech Stocks and Rotation in the Market
Large tech stocks hit a wall in 2024 after leading the stock surge for the rest of the year. Bets on Fed rate reduction and worries that AI hasn’t yet produced meaningful returns caused traders to shift from megacaps to trailing segments of the market.
Vital Knowledge’s Adam Crisafulli stated, “Tech’s problem isn’t just that earnings aren’t perfect; the group is still caught up in the violent rotation trade that kicked off with the June CPI.” “A lot of people thought the anti-tech rotation would be temporary, so the fact that it’s holding strong is increasing people’s apprehension and driving up sales pressure.”
Season of Earnings and Valuations
Some values have fallen as a result of these stocks’ decline. The earnings season is only getting started, even if this could promote dip buying. Next week will see the release of results from major firms including Apple Inc., Microsoft Corp., Amazon.com Inc., and Meta Platforms Inc.
Interactive Brokers’ Jose Torres thinks the equities downturn is still ongoing. “We predicted yesterday that this quarter, which is traditionally the worst of the year, would see a 10% to 15% correction,” Torres stated. “This quarter, front-loaded gains, irrational exuberance, a high bar for earnings estimates, and a presidential election are paired with the valuation concerns.”
US Earnings Season Has Started Weakly
US second-quarter earnings season is off to a less impressive start than typical. According to Bloomberg statistics, of the S&P 500 businesses that released their results, earnings exceeded analyst projections by the smallest margin since the end of 2022, while sales surprises were the worst in a minimum of two years.
In the second half of 2024, Dan Wantrobski of Janney Montgomery Scott anticipates more volatility and the possibility of a 10%–15% drop in benchmarks such as the S&P 500 and the Nasdaq 100. Wantrobski stated, “Our research does not currently indicate a secular or structural downturn, but rather a pause in the reflationary expansion cycle that started a few years ago.”
Crucial Technical Measurement: The 200-DMA
A key technical indicator in the US stock market is getting closer to all-time highs as the earnings reports come in. The S&P 500’s performance is gauged by the 200-day moving average (200-DMA) in relation to this longer-term indicator. Bloomberg data shows that the benchmark was trading up to 15% above it last week. Even if the difference has now closed to 9% as of Wednesday’s end, drops in the index in 2011, 2018, and 2021 were preceded by such a large difference above 12%. This is a caution to investors about high tech values and concentration risk, even if it doesn’t always portend a market disaster.
Business Highlights
- As clients embrace the newest technology, International Business Machines Corp. reported a spike in reservations for its AI division.
- Ford Motor Co. reported second-quarter earnings that fell short of Wall Street forecasts, blaming higher warranty costs and problems with new car quality.
- Bank of America Corp. revealed plans to buy back $25 billion in shares.
- Whirlpool Corp., the company that owns Maytag, reduced its profitability projection for the entire year as a result of consumers spending less on expensive appliances in the face of a cooling housing market.
- Chipotle Mexican Grill Inc. surpassed second-quarter projections because to time-limited deals and prompt service, but the company issued a warning about impending pressure on profitability.
- ServiceNow Inc. announced second-quarter sales and bookings that were higher than anticipated, demonstrating a high level of demand for its software solutions.
Important Occasions This Week
- US GDP, first unemployment claims, durable goods; – Germany’s IFO business environment on Thursday; – US personal income, PCE, and consumer sentiment on Friday;
Changes in the Market
Equities:
- S&P 500: -2.3 percent
- 3.7% for the Nasdaq 100
- 1.25% is the Dow Jones Industrial Average.
- -1.8% for the MSCI World Index
- Total Return Index for Bloomberg Magnificent 7: -5.9%
Index of the Russell 2000: -2.1%
Values:
- The Bloomberg Dollar Spot Index has not altered much.
- In euros, down 0.1% to $1.0839
- British Pound: at $1.2905, barely changed.
- Japanese Yen: up 1% to $135.98.
Digital Money:
Coinbase: Up 0.1% to $65,934.43
Ether: down 3.2% at $3,372.06.
Credits:
- Yield on Treasury Securities for Ten Years: +3 basis points to 4.28%
Germany’s 10-year yield, at 2.44%, has not changed much. - The 10-year yield for Britain is +3 basis points, or 4.16%.
Goods and Services:
- West Texas Intermediate oil: up 0.6% to a barrel of $77.45
- Spot gold: down 0.5 percent to $2,398.57 per ounce
