Stocks Get Hit as ‘AI Trade’ Slams Into a Wall: Markets Wrap

By Investor Empires On Jul 24, 2024

(Bloomberg) — Wall Street is now facing a reality check after a disappointing start to the earnings season for large-cap companies, raising concerns that the artificial intelligence craze that has fueled the bull market may be overdone.

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The world’s biggest tech companies dragged the S&P 500 toward its worst slide since the height of the regional banking crisis in March 2023. The losses were most pronounced in the Nasdaq 100, which fell 3%. Alphabet Inc. dropped 5% after pouring more resources into its effort to beat rivals in artificial intelligence, spending more than analysts had expected. Tesla Inc.’s failure to report earnings and Robotaxi delays sent its shares down 10%.

“Investors are finally waking up to all this AI spending and realizing that it’s a lot more of an expense right now than a revenue generator,” Peter Boockvar said in the Boock report.

Wednesday’s session was another lesson in the “concentration risks” that pessimists see lurking in a market that has been driven disproportionately by a narrow group of outsized winners. For the fourth straight session — and the 10th in 11 days — smaller companies outperformed larger ones, suggesting investors’ tastes are shifting away from the tech giants that have come to dominate the gauges.

Goldman’s Lead Equity Analyst Waits for AI Bubble to Burst

Treasury yields fell, driven by shorter maturities. Former New York Fed President William Dudley has called for lower borrowing costs — preferably at next week’s meeting. Such a move would be alarming to many analysts because it suggests officials are rushing to avoid a recession.

The Canadian dollar fell after the Bank of Canada cut interest rates, highlighting “downside risks.” The yen hit its highest since May amid a pullback in interest rate deals.

Steve Clayton of Hargreaves Lansdown believes this could be the year markets start talking about the “mid-seven”, noting that Tesla and Alphabet’s results are not enough to sustain their momentum.

“The market is not happy with the start of earnings season for big tech stocks,” said Kathleen Brooks, director of research at XTB. “There has been a lot of riding on these results and we don’t think they provide clear answers to questions about the effectiveness and earnings potential of AI at this time.”

After leading the rally in stock prices for most of 2024, Big Tech has hit a wall. Traders have rotated between the big companies and the laggards, driven by bets on a Fed rate cut and worries that the hype around artificial intelligence has yet to come to fruition.

The decline in these stocks has taken some of the air out of valuations. Of the seven, only about half are still trading above their five-year average.

While that could be a reason to buy into the dip, earnings season is just getting started. Apple Inc., Microsoft Corp., Amazon.com Inc. and Meta Platforms Inc. are all scheduled to report results next week.

It’s also worth noting that the second-quarter earnings season started out weaker than usual across the board.

Among S&P 500 companies that reported results, earnings beat analysts’ estimates by the smallest margin since the end of 2022 — while sales surprises were the worst in at least two years, according to data compiled by Bloomberg.

As earnings pour in, one of the key technical indicators in the U.S. stock market appears overbought as it has reached historic extreme levels — a crucial gauge that has predicted previous sell-offs.

Known as the 200-day moving average — short for 200-day moving average — it measures the S&P 500’s performance relative to that longer-term measure. At one point last week, the benchmark was trading about 15% higher than it, according to data compiled by Bloomberg.

While this doesn’t necessarily mean the market is about to crash, it is a warning sign for investors concerned about high tech valuations and concentration risks.

The recent decline in U.S. stocks sends a warning to trend-following mutual funds: Sell U.S. stocks no matter which way the market is going.

Both the Nasdaq 100 and the S&P 500 have broken through the thresholds that trigger a sell signal for commodity trading advisors, or CTAs, according to models on the trading desk at Goldman Sachs Group Inc.

Rule-abiding traders could dump $32.9 billion in global stocks, with $7.9 billion flowing out of the U.S. market, according to an analysis by the bank’s trading desk. Even if the market reverses its downward trend, rule-abiding traders would still be willing to sell $902 million in U.S. stocks.

The company’s most prominent achievements:

Texas Instruments Inc. gave a sales forecast that suggested an inventory glut is nearing an end, reassuring investors that a recovery is underway in the company’s key chip markets.
AT&T Inc. added far more mobile subscribers than Wall Street had expected in the second quarter, as fewer customers opted out and many added wireless service to their broadband plans.
Visa Inc. reported quarterly revenue that came in slightly below Wall Street estimates — a rarity for the world’s largest payments network.
Pfizer’s gene therapy for a severe bleeding disorder has met its goal in a crucial late-stage trial, paving the way for the company to enter a market that has proven challenging for drugmakers.
Deutsche Bank AG said it is likely to hold off on a second share buyback this year, after posting its first quarterly loss in four years.
Kering warned that its profits are expected to fall in the second half of the year as demand for luxury goods slows and turnaround efforts at Gucci, its biggest brand, continue to falter.
Renault has reported its highest-ever profitability in the first half of the year as the carmaker benefited from lower raw material prices and strong demand for more expensive sports utility vehicles such as the Austral and Espace.
Blackstone Mortgage Trust, which provides financing for commercial real estate, reported a 24% drop in profit as defaults increased and borrowers struggled to make payments or refinance their loans.
Cybersecurity firm CrowdStrike Holdings Inc., a company at the heart of massive global IT outages, said a security flaw allowed compromised data to be released to customers in a botched update, causing the crash last week.

Main events this week:

IFO Business Climate Index for Germany, Thursday
US GDP, Initial Jobless Claims, Durable Goods, Thursday
US Personal Income, Personal Spending Index, Consumer Sentiment, Friday

Some key movements in the markets:

Stores

The S&P 500 was down 1.7% as of 1:49 p.m. ET in New York.
The Nasdaq 100 fell 2.9%.
The Dow Jones Industrial Average fell 0.8%.
The MSCI World Index fell 1.4%.
The Bloomberg Magnificent 7 Total Return Index fell 5%.
The Russell 2000 Index fell 0.5%.

Currencies

The Bloomberg Dollar Index fell 0.2%.
The euro was little changed at $1.0849.
The pound was little changed at $1.2920.
The Japanese yen rose 1.2% to 153.79 yen per dollar.

Cryptocurrencies

Bitcoin rose 1.2% to $66,633.04
Ether fell 1.7% to $3,426.07

Bonds

The yield on the 10-year US Treasury note was little changed at 4.25%.
The yield on the 10-year German bond was little changed at 2.44%.
The yield on the 10-year British bond rose three basis points to 4.16%.

Goods

West Texas Intermediate crude rose 1% to $77.74 a barrel.
Spot gold rose 0.1 percent to $2,412.31 an ounce.

This story was produced with the help of Bloomberg Automation.

–With assistance from Aya Wagatsuma, Lu Wang, Jessica Minton, Sagarika Jaisinghani, Joel Lyon, Tatiana Dary, Natalia Knyazevich, Alex Nicholson and Julian Ponthus.