Quick Look:
- Dow Jones, S&P 500, and Nasdaq futures rose modestly ahead of key earnings reports from major tech companies.
- Last week saw a split market; small-caps rose while the Nasdaq fell, with notable drops in Tesla and Alphabet.
- Investors anticipate signals of rate cuts from the Fed’s July 30-31 meeting, which could affect market stability.
- Despite tech weakness, sectors like housing, industrials, and financials showed resilience and buying opportunities.
Dow Jones futures rose modestly early Monday, accompanied by S&P 500 futures and Nasdaq futures. The spotlight this week is firmly on the earnings reports from the AI tech giants Apple (APPL), Microsoft (MSFT), Meta Platforms (META), and Amazon.com (AMZN). These tech titans are expected to provide crucial insights into AI capital spending and monetization, especially after a week marked by significant market divergence. Adding to the financial drama, the Federal Reserve is anticipated to signal forthcoming rate cuts, setting the stage for a potentially volatile market week.
The Tech Sell-Off and Diverging Markets
Last week, the stock market experienced a notable split. While small-cap stocks soared, providing many buying opportunities across various sectors, the Nasdaq tumbled below its 50-day moving average. The S&P 500, however, managed to regain this critical level by the end of the week. Major disappointments came from Tesla (TSLA) and Google-parent Alphabet (GOOGL), both of which saw substantial drops post-earnings. Concerns raised by the CEOs of Google and Meta about excessive AI spending further slammed Nvidia (NVDA), adding to the tech sector’s woes.
With the upcoming earnings reports from Apple, Microsoft, Meta Platforms, and Amazon, the market will closely watch for any signs of continued heavy spending on AI. These signals will play a significant role in shaping investor sentiment and dictating market trends for the foreseeable future.
The Federal Reserve’s Crucial Meeting
The Federal Reserve’s meeting on July 30-31 is another investor focal point. While the market widely expects the Fed to maintain current interest rates, Fed Chair Jerome Powell’s statements will be scrutinised for any hints of a readiness to cut rates shortly. Investors have already priced in at least one rate cut by September, with expectations of two to three cuts by the end of the year.
Powell provided a clear indication that future rate cuts could stabilize the markets. However, any ambiguity or hesitation might trigger an adverse reaction, adding to the already heightened volatility. The outcome of this meeting will be pivotal, influencing both market direction and investor confidence.
Stock Market Rally and Sector Performances
The stock market showed signs of recovery last week despite the mixed performances across different indices. The Dow Jones Industrial Average gained 0.6%, buoyed by a substantial 1.5% jump on Friday, which helped it rebound from a dip to the 21-day moving average. The S&P 500, despite a 0.8% decline over the week, managed to reclaim its 50-day moving average.
In contrast, the Nasdaq composite fell 2.1%, unable to hold above its 50-day line even after a slight rebound on Friday. The small-cap Russell 2000 outperformed, leaping 3.5% and approaching recent multiyear highs. Among ETFs, the Invesco S&P 500 Equal Weight ETF (RSP) climbed 0.8%, and the First Trust Nasdaq 100 Equal Weighted Index ETF (QQEW) dropped 1.65%, reflecting broader tech sector weaknesses.
The upcoming Big Tech earnings and the Federal Reserve’s rate outlook will be crucial in determining whether the Nasdaq can stabilize or descend further into correction territory.
Sector-specific Movements and Opportunities
While tech stocks have been under pressure, other sectors have shown resilience and promise. Housing, construction, industrials, aerospace, financials, energy, medicals, and even some software stocks have presented attractive buying opportunities. The 10-year Treasury yield decreased slightly to 4.2%, while the two-year yield fell sharply, reducing the yield curve inversion.
Oil prices dropped 1.89% to $77.16 per barrel, continuing a downward trend over the past three weeks. Among ETFs, the Innovator IBD 50 ETF (FFTY) slipped 1.3%, and the iShares Expanded Tech-Software Sector ETF (IGV) saw minimal losses, with Microsoft as a significant holding. The VanEck Vectors Semiconductor ETF (SMH) declined 3.2%, affected by Nvidia and AMD.
Growth in infrastructure development and homebuilding sectors was evident, with ETFs such as the Global X U.S. Infrastructure Development ETF (PAVE) and the SPDR S&P Homebuilders ETF (XHB) posting gains. The Financial Select SPDR ETF (XLF) and SPDR S&P Regional Banking ETF (KRE) also performed well, reflecting confidence in the financial sector.
Big Tech’s AI Spending Under Scrutiny
Apple, Microsoft, Meta, and Amazon have had a challenging week, with only Apple maintaining a position above its 50-day line. Investors eagerly await signs of how these companies plan to monetize generative AI. Apple’s upcoming AI-enabled iPhone 16 and Microsoft’s Copilot efforts are particularly in focus. The performance of Microsoft Azure and Amazon Web Services will also be critical.
The question remains whether these tech giants will continue their substantial AI investments. Meta’s Mark Zuckerberg and Alphabet’s Sundar Pichai acknowledged potential over-investment in AI but emphasized that under-investment poses a greater risk. This ongoing heavy spending is crucial for maintaining market positions and revenue streams, with new ventures like Microsoft’s AI-powered SearchGPT challenging Google’s dominance.
The performance of Nvidia, AMD, and Arm Holdings in the AI sector will also be closely watched. Nvidia’s stock, for instance, could see a revival with vital AI capital expenditure from these tech giants. Arista Networks, which depends on capital spending plans from significant customers like Microsoft and Meta, also faces a critical week with its upcoming results.
As we navigate this pivotal week, the interplay between Big Tech earnings, AI investment signals, and Federal Reserve policies will set the tone for market dynamics and investor strategies.
