The massive exodus of big tech companies has sent the Nasdaq 100 down 8% in just two weeks, putting it on the verge of a correction. Whether it can avoid that dubious event will likely hinge on the earnings of four companies whose combined value is nearly $10 trillion.
In a week that also holds a Federal Reserve interest rate decision, investors will focus primarily on Microsoft Corp.’s earnings on Tuesday, followed by Meta Platforms Inc., Apple Inc. and Amazon.com Inc. over the next two days.
The stakes were already high after a massive first-half rally for Big Tech that left the biggest companies with big stock price gains and inflated valuations. They became all the more critical after Alphabet Inc.’s earnings last week. raise concern Spending on AI is becoming overvalued compared to short-term returns.
“These earnings are really significant,” said Michael O’Rourke, chief market strategist at JonesTrading. “If you can’t beat expectations, I think the explanation is that AI isn’t delivering the results that people are hoping for.”
The results come amid a market roiled by one of the fastest and steepest cycles in years. Investors have finally grown wary of AI leaders after ignoring warnings for months that their run was overdone. They sold off the Nasdaq 100 by $2.6 trillion, investing in long-time laggards including small caps, financials and industrials. The index recovered slightly on Friday, gaining 1%, but not enough to recoup losses earlier in the week.
the rotation Interest rates began to fall in earnest after a June reading showed inflation was falling, sparking bets that the Federal Reserve will cut rates in September. The Russell 2000 has jumped 10% since then, while financials and industrials in the S&P 500 have gained 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 Chair Jerome Powell speaks.
During the turnaround, traders raised options prices on the Invesco QQQ Trust Series 1 ETF, which tracks the Nasdaq 100, to protect against further slide, pushing the premium on bearish put options to an eight-month high. The Cboe Volatility Index rose above 18 this week for the first time since April, while a similar measure of volatility on the Nasdaq 100 touched its highest level since October — the last time the index was in a correction.
“This is what happens when you have a small amount of supply in the market and everyone is relying on the same few stocks,” said Michael Matusik, chief trader at U.S. Global Investors.
The first test will be at Microsoft. The software giant has been embedding AI services into its software suite and spending heavily to build data center capacity. In Microsoft’s third fiscal quarter, which ended in March, the company spent $11 billion in capital spending. That figure is expected to rise to more than $13 billion in the fourth quarter.
Meta Platforms, which reports on Wednesday, and Amazon, which reports on Thursday, were also big spenders, and investors will be looking for signs that AI is moving the revenue needle.
Apple Inc. shares have surged 32% from their April lows on optimism about the company’s plans to integrate artificial intelligence services into iPhones. Investors will be looking for more details when the company reports on Thursday.
“There are growing concerns that the return on investment from massive AI spending may be further away than expected or not as profitable as thought, and this is spreading across the entire semiconductor chain and all AI-related stocks,” said James Abate, chief investment officer at Centr Asset Management.
Losses are mounting among some of the most expensive AI stocks. Shares of Nvidia, the industry leader, have fallen 17% from their all-time high on June 18 when Overtake Microsoft and Apple are set to briefly become the world’s most valuable companies. Shares of Dell Technologies, which makes servers used in data centers, have fallen 37% from their peak in May. Shares of rival Super Micro Computer Inc. have fallen 40% since March.
Six of the biggest U.S. technology stocks contributed most of the S&P 500’s 14% gain in the first half of the year. The market-cap-weighted index outperformed its peers by the most since 1999. Valuations have soared, with the S&P 500’s information technology index earlier this month hitting its highest price-to-earnings ratio since 2002.
“The big tech companies were priced to perfection and accounted for almost all of the market’s gains, which underscores the weakness of the group,” Abate said.
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