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Big Tech Earnings Come In As Nasdaq 100 On Brink Of Correction
(Bloomberg) — Big Tech’s violent rotation has dragged the Nasdaq 100 Index down 8% in just over two weeks, leaving it on the brink of a correction. Whether it can avoid that dubious milestone will likely depend on the profits of a quartet of companies worth nearly $10 trillion combined.
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In a week that also brings an interest-rate decision from the Federal Reserve, investors will focus primarily on results from Microsoft Corp. on Tuesday, followed by Meta Platforms Inc., Apple Inc. and Amazon.com Inc. in the next two days.
The stakes were already high after a torrid first-half rally for Big Tech left the biggest companies with fat share price gains and stretched valuations. They turned stark after Alphabet Inc.’s earnings last week raised concerns that spending on artificial intelligence was too high relative to near-term returns.
“These gains are really important,” said Michael O’Rourke, chief market strategist at Jonestrading. “If you can’t beat expectations, then I think the interpretation is that AI isn’t delivering the way people expected it to.”
The results will come as markets have been roiled by one of the fastest and sharpest rotations in years. Investors have finally grown cautious about companies at the forefront of AI after ignoring months of warnings that their run was too long. They sold off $2.6 trillion of the Nasdaq 100 and piled into stocks that had long been laggards, including small companies and financial and industrial firms. The index rebounded slightly on Friday, posting a 1% gain, but not enough to offset losses earlier in the week.
The rotation into cyclical pockets of the market began in earnest after a June price reading showed cooling inflation, fueling bets that the Fed will cut interest rates as early as September. The Russell 2000 has jumped 10% since then, while financials and industrials in the S&P 500 have risen more than 3.5%. Investors will get a better read on the prospects for any cuts when the Fed releases a policy statement on Wednesday and Chairman Jerome Powell speaks.
During the move, traders have been bidding up options on the Invesco QQQ Trust Series 1 ETF that tracks the Nasdaq 100 to protect against a further decline, pushing the premium for bearish puts to the highest in eight months. The Cboe Volatility Index jumped above 18 this week for the first time since April, while a similar measure of turbulence on the Nasdaq 100 hit its highest since October — the last time the index was in a correction.
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“This is what happens when you have such a narrow range in the market and everyone is riding on the same few stocks,” said Michael Matousek, chief trader at U.S. Global Investors Inc.
The first test will be Microsoft. The software giant has been integrating AI services into its suite of software products and has spent heavily to build data center capacity. In Microsoft’s fiscal third quarter, which ended in March, the company invested $11 billion in capital expenditures. That figure is expected to rise to more than $13 billion in its fiscal fourth quarter.
Meta Platforms, which reports on Wednesday, and Amazon, which reports on Thursday, have also been big spenders, and investors will be watching for signs that AI is influencing revenue.
Apple shares have surged 32% from their April lows on optimism about the company’s plans to integrate AI services into its iPhones. Investors will also be looking for additional details when it releases its earnings report on Thursday.
“There are growing concerns that the return on investment from heavy spending on AI is further away or not as profitable as believed, and this is rippling across the semiconductor chain and all AI-related stocks,” said James Abate, chief investment officer at Centre Asset Management.
The carnage is mounting among some of the hottest AI stocks. Nvidia Corp., which is at the forefront of the industry, has fallen 17% from a record high on June 18, when it surpassed Microsoft Corp. and Apple Inc. to briefly become the world’s most valuable company. Dell Technologies Inc., which makes servers used in data centers, has fallen 37% from a peak in May. Rival Super Micro Computer Inc. is down 40% since March.
The six largest U.S. technology stocks accounted for most of the S&P 500’s 14% gain in the first half of the year. The capitalization-weighted index outperformed its equal-weight cousin by the biggest margin since 1999. Valuations have soared, with the S&P 500 information technology index earlier this month hitting its highest forward price-to-earnings ratio since 2002.
“Big tech companies were priced for perfection and accounted for nearly all of the market gains, which only highlights the vulnerability of the group,” Abate said.
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