A Classic Washout and More Mixed Reactions to Earnings
Amazon is up and Apple is down after their reports.
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The doom and gloom lifted on Thursday as stories circulated about forced selling of the public portfolio of hedge fund Situational Awareness. The exact numbers are unclear, but Citadel snapped up the bulk of the shares that Situational was forced to dump due to liquidity issues.
This is classic washout action. The timing is what makes it useful. The sale reportedly happened Wednesday, which was the day the market closed at its lows with breadth at 30% and the chips down 8%. Thursday the same names that were being liquidated led the bounce. The selling stopped because the seller was finished, not because the news improved.
There were fears that there may be other heavily leveraged funds in that situation but nothing solid has shown up yet.
The Bounce Had Help
The washout was boosted by a strong positive reaction to earnings from Microsoft (MSFT). Meta Platforms (META) was a disappointment, but it held steady most of the day after an 8% drop. That was a victory given the news there.
The most hard hit groups led the bounce with chips, data centers, and other AI-adjacent names running up steadily after a mid-morning dip. The close was near the highs of the day.
What the Breadth Is Telling Us
While the action was upbeat and there was a huge number of smaller stocks jumping more than 10%, breadth was mediocre with about 55% of stocks advancing. Alphabet (GOOGL) and Apple (AAPL) were laggards.
The defensive names which have been safe havens were weak. Eli Lilly (LLY) took a 4.5% hit and Johnson & Johnson (JNJ) slipped 3.8%. That is where the money for this bounce came from. The rotation that has been running into defensives for two weeks reversed, and that is why breadth stayed mediocre on a day that felt much better than 55% would suggest.
The After-Market Reports
Amazon (AMZN) delivered the clearest answer yet on whether the AI spending is working, though the headline numbers are a bit deceptive. Reported earnings came in at $5.75 per share against a $1.82 consensus, which looks like a monster beat until you read the detail. Net income of $62.6 billion includes $53.4 billion of non-operating pre-tax other income, primarily from Amazon’s investment in Anthropic. That is an accounting mark on a private stake rather than money the business earned. This is the same thing we have seen with Alphabet, where investment marks swing the reported figures around and tell you nothing about the operations.
The number that matters is operating income of $27.461 billion against the company’s own guidance of $20 billion to $24 billion. Revenue came in at $200.6 billion, ahead of consensus. Amazon Web Services did $42.23 billion with growth excluding currency at 37%, well above the 31.3% analysts expected. That is a cloud business accelerating and that is the main story.
Third-quarter guidance of $197 billion to $202 billion looked light against a consensus above $203 billion, and the stock is up around 10% anyway. The reason is in the details. Amazon said the guided growth of 9% to 12% would be nearly 400 basis points higher without the Prime Day timing difference between the two years, with another 80 basis points of drag from currency. Operating income is guided to $22.5 billion to $26.5 billion against $17.4 billion in the same quarter last year. What there is here is a large increase in profitability.
Two weeks ago a soft guide was enough to take a mega-cap apart regardless of what else was in the report. Alphabet delivered its strongest growth in five years and fell into a bear market over a capex number. Tonight the market read past a light headline and bought the stock because the spending is showing up as increased revenue.
Apple beat on both lines with EPS of $2.02 against a $1.89 consensus on revenue of $109.4 billion, just ahead of expectations. The product numbers were strong. iPhone revenue came in at $54.25 billion against $44.58 billion a year ago, and Mac did $10.35 billion against $8.05 billion.
The stock is down about 2.5% after hours anyway, and there are two reasons. Gross margin of 50.1% includes about 2 percentage points from tariff refunds, which the company disclosed. Take that out and the margin is closer to 48%. Like Amazon’s Anthropic gain, it is a headline number that needs adjusting before it means anything.
The other reason is the character of the day. Apple was already a laggard during the session. It has been the one mega-cap not spending heavily on the buildout, and that made it a hiding place for the past two weeks. On a day when the market decided the spenders could be rewarded again, the company staying out of it lost its premium.
This is the sorting I have been describing. Investors are separating the companies that can show returns on the buildout from the ones that cannot. Microsoft and Amazon are in the first group. Meta landed in the second. Apple got no credit for staying out of it.
Game Plan
I continue to wait for small-cap earnings season to start. I mentioned buys of The Oncology Institute (TOI) and Precigen (PGEN) in my midday column and they both acted well. I’ll be looking for more.
Thursday removed a forced seller and gave us two reports that showed the spending producing results. That is a better setup than we have had in three weeks. It is not a bottom until it survives a few sessions, but the conditions have improved.
Have a good evening. I’ll see you Friday.
At the time of publication, Rev Shark was long PGEN and TOI.
