Stocks managed to rally yesterday in the wake of a fear-based AI and everything selloff from Tuesday’s session provided buying opportunities. Savvy traders who recognized the overreaction were rewarded for their confidence and homework.
If you want to get, you gotta’ give. I grew up in a shore town and was blessed to have a boardwalk close to my home. I can remember going with my family on what seemed most nights in the hazy, firefly-filled nights of my youth. My father would hand out some nickels to each of us and we would apply ourselves to the hunt, all of us confident that a wheel would stop on our number. I was not very lucky with those wheels, but for some reason, my sister managed to fill her entire bed with blue-hued unicorns, plush crabs, and pink teddy bears. I was always drawn to the wheels with the big prizes like model airplanes, radios, and electric guitars. Those would require me to put down 5 of my nickels per spin… high stakes. At the end of the night, my father would always raise the bar. He would offer up an extra quarter to anyone who was brave enough to go on the roller coaster with him. The allure of another crack at the shiny prizes caused me to opt in on most nights. I can still remember holding tight as the car climbed with its click-click-click-click. As we ascended, I could make out the lights of fishing boats far out at sea while my sister, plush toy under her arm, would get smaller and smaller on the ground (she never needed the extra quarter 😉). As the zenith approached, my heart would race. I would grab tight and close my eyes as tightly as possible and dream that my investment would pay off.
Earnings season is just getting underway. Financials were first up, and we are just about 1/3 of the way through the sector in the S&P500, and things are looking positive so far. So far, 90% of reporting S&P500 financials have beaten on EPS and 75% have beaten Sales estimates with an average surprise of +10.2% and +2.47% respectively. Growth in EPS and Sales for the financials was around +5%, in line with the broader S&P500 expectations. Financials, because they are first up, always set a tone for at least the first half of earnings season. This time, there is, perhaps, a bit more focus on the group as it has had a solid run in recent months and investors are eager to see what affects lower interest rates may be having on their outlooks. This raises the bar somewhat. Looking at market reaction, reporting financials have enjoyed a +2.43% price increase in day after the announcement. Based on the beat stats, that means that the markets are responding positively. So far so good with plenty more teed up in the days to come.
On Tuesday, a surprise release from Dutch semiconductor equipment manufacturer ASML reminded all of us, that tech earnings (broadly) are going to be the real determinant of success as a lower-than-expected guidance number sent the industry, the sector, and the broader markets into a bit of nasty decline. Now, of the 65 S&P500 members in tech and 24 members in communications, only 6 have announced to date, not enough to determine a trend. Of those few that have announced, day-after price movements have been almost +7% compared to all reporters which returned around +2%. The stakes are high in tech, having returned +32% year to date and +49.5% from a year ago. To quote myself, “investors are expecting nothing less than fireworks” from the sector, and Tuesday’s ASML fiasco supports that notion. The first of the tech-sector Magnificent 7 stocks to announce will be Microsoft which is scheduled to announce next Wednesday. Microsoft is always an important tech announcement, but it has become increasingly important as it has made a significant investment in AI, and, in my opinion, was really the first company to open investors’ eyes to the opportunity in early 2023. Since then, the company has not only made AI-based products commercially available, but it has increased its investment in the space. In last quarter’s earnings investors began to question the potential returns on these AI investments with criticism growing as valuations of these companies get stretched to the limits.
It is important to note that the Mag-7 stocks span several sectors; they are not just in the tech sector. Only Microsoft, Apple, and NVIDIA, are in the tech sector… er, technically. Tesla, which is first overall, Mag-7 announcer, is in the consumer discretionary sector, as is Amazon. They will announce earnings next Wednesday and Friday, respectively. Amazon, in addition to its online retail dominance is also involved in AI with its AWS offering and its performance can be a critical bit of information, an appetizer for the broader AI release schedule. Wait, did we forget Alphabet? It is in the communications services sector along with Meta. Alphabet will announce on the 29th, a day ahead of Microsoft, and Meta will announce on the same day as Microsoft. It will surely be two days of soul searching for those who have invested in those companies for their AI offerings.
To sum up, tech earnings are coming, and the market is waiting on the edge of its seat. Of course, AI is at the top of mind, as it impacts so many industries like chips, equipment, software, and media, to name just a few obvious ones. The Mag-7 had a fantastic run through peaking in early July with +51% gains only to give up -5.8% since. A lot of hope is invested in the recently languishing group. Finally, I would be remiss if I did not mention that some tech stocks will start to announce earlier next week that also have a hand in the AI boom, such as Lam Research and IBM. The week after will feature AMD and Intel. All these will be HIGHLY SCRUTINIZED for the health of AI, the broader tech-related sectors, the Mag-7, and… yes, the overall market.
The top of that climb with its click-click-click-click is nearing, my friends. Once we pass it, it will be ups and downs, turns, and maybe some loops. Please be sharp as the stakes will be high. As with the shiny prizes that required a quarter to play, great potential returns require bigger risks, and usually come with more ups and downs. For me, it took until 1978 to realize that I was never going to win the radio, it also helped that Space Invaders only cost a quarter to play. I would put all my money into that in the years that followed. As I got older, I still rode the Galaxy rollercoaster with my dad every time, but not so much for the quarter 😉. Hang on tight as I did, but DON’T close your eyes, this ride is going to be filled with a lot of information that you need to know.
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