AI Spending Concerns Are Hitting the Magnificent Seven
The market is very unstable as a wave of major news events arrives.
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Microsoft MSFT and Meta META posted earnings reports that beat estimates on Thursday night, but guidance was lower than hoped. While management continues to discuss the great potential for AI, capital investment is higher than expected, and bottom-line results are not arriving as quickly as hoped.
Both companies still see substantial growth, but expectations are extremely high, and valuations are already very aggressive. The posted numbers were not strong enough to cause the same excitement that existed two quarters ago.
The Magnificent Seven names have another shot on Thursday night when Apple AAPL and Amazon AMZN issue their quarterly results. So far, the best report in the group was Alphabet GOOGL, which gapped up at the open on Wednesday but has been steadily fading and is now starting to fill the gap.
The primary market issue with the Magnificent Seven MAGS is that they have been leaders for a long time. They stumbled after second-quarter earnings, lost their relative strength, and may face further struggles.
However, even if the reports from the group aren’t quite as good as expected, they are very likely to remain safe havens and will attract buyers on dips. While their valuations may be aggressive, they still see tremendous growth from AI and will not suddenly collapse.
The current market environment complicates the conundrum of the Mag 7 names. There is very likely going to be a surge in volatility next week due to the presidential election results, and these stocks won’t be a great hiding place unless they have better values.
There is a tremendous amount of news risk right now from earnings, economic data, and the election. The indexes are still close to all-time highs, which creates a potential sell-the-news situation regardless of whether the news is good or bad.
I’ve been increasing my cash position, and my plan is to keep stops tight and look for opportunities to buy pullbacks on a surge in volatility. The election is the great unknown and will be particularly dangerous for the market if there is no clear winner at an early point.
At the time of publication, Rev Shark had no positions in any securities mentioned.
