AI Stocks Ride to the Rescue, But Market Conditions Remain Very Challenging
Hopefully, we’ll see more rotation into smaller stocks as the indexes figure out what to do next.
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Following a mediocre earnings report from Meta META and some poor economic news on Thursday morning, the indexes looked in danger of testing recent lows. There were worries that the AI theme was losing its market leadership and that there was danger of stagflation taking hold as economic growth slowed and inflation picked up traction.
Despite the negatives, market players bought the gap-down open on Thursday, and then Microsoft MSFT and Alphabet (GOOGL) posted very strong reports, which relieved concerns about how quickly AI would start to create profits for the technology giants. The big winners in AI are still the infrastructure providers, but both Microsoft and Alphabet are expected to produce double-digit growth.
The Nasdaq 100 (QQQ) is indicated about 1% higher on Friday morning but the big issue now is whether big-cap AI-related names can provide the leadership to drive the indexes back to the highs they hit in March.
There are several major obstacles to a recovery. The first is the problem of interest rates and inflation. PCE inflation news is due out on Friday at 8.30 am ET, and if it confirms the recent uptick in inflation, then that may be enough to remove any chance of a rate cut in 2024. There is even talk now about a rate hike, and the word "deflation" is becoming more popular.
For much of the past year, the market has been able to trend steadily higher due to big-cap AI leadership despite the fact that interest rates were consistently pushed back. The market was pleased with the economic growth, which offset the inflation worries. That dynamic changed recently and may prevent the indexes from regaining their upward momentum.
There are still a slew of earnings reports to come, with Apple AAPL and Amazon AMZN being the big names next week. There has been a tendency to sell into strength recently, and we’ll see how Microsoft and Alphabet do on Friday as the positive news is digested.
The bulls have some positive ammunition, but the economic news is a problem, and there is technical overhead to contend with. We will soon be moving into greater seasonal weakness as well.
Hopefully, we’ll see more rotation into smaller stocks as the indexes figure out what to do next. There is fuel for bounce action, but don’t trust it to last too long.
At the time of publication, James "Rev Shark" DePorre was long AMZN.
