Amazon Leads Unconvincing Bounce After Morgan Stanley Price Target Change
The mega caps did the heavy lifting while most stocks went nowhere.
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The Magnificent Seven led a bounce on Monday with a gain of about 2%. Amazon.com (AMZN) was the star of the group, jumping more than 5% after Morgan Stanley named it a top pick and raised its price target to $350. Semiconductors and data center names bounced too, but they faded from their early highs, and the rest of the market never joined the party. Only about 40% of stocks finished higher, and more than 475 new 12-month lows emerged.
Bounce Built on Predictions
The Amazon call goes right to the issue I wrote about on Monday morning. Morgan Stanley’s case is that Amazon Web Services, the cloud computing business, will grow its revenue 47% in 2027 and 42% in 2028. That supports earnings of about $16.50 a share in 2028. Much of that growth is tied to Nvidia’s (NVDA) indication that AWS will deploy about 2 million more of its chips over the next two years.
That is a forecast more than two years out, and last week the market was questioning those kinds of forecasts. On Monday, investors were willing to pay for one again, but only from a company that can fund its AI spending out of its own pocket. That fits the split I’ve been discussing. The giants that pay for the buildout with cash are getting the benefit of the doubt. The companies that borrowed to build ahead of demand are not.
The semiconductors and data center names were the tell. They opened strong and faded as the day went on, which suggests the folks who were trapped last week used the bounce to reduce exposure.
Wrong Kind of Bounce
What concerns me is the shape of the day. The mega caps did the heavy lifting while most stocks went nowhere, so the gap between the two tiers of the market widened again, not narrowed. That is the opposite of what we need. Interest rates also moved up, which doesn’t help the smaller and more rate-sensitive stocks that make up most of the market.
A turning point will have broad buying, with the beaten-down groups leading and new lows drying up. We didn’t get that. This looked like routine oversold bounce action in the stocks that were hit hardest last week. Investors would like to believe it is more than that, but there isn’t enough evidence to jump to that conclusion.
Earnings will settle the debate. SpaceX (SPCX) reports on Tuesday, and Meta Platforms (META) and Tesla (TSLA) follow on Wednesday. The bulls are betting that guidance will support current valuations. If it does, the market can keep stabilizing. If it doesn’t, last week’s selling will pick up where it left off.
Game Plan
I’m not trying to guess the outcome. I’m watching for rotation to gain traction and for new leaders to emerge. For new picks, I’m focusing on relatively strong stocks holding above key moving averages. Stocks that act well in a market like this one tend to lead when conditions improve.
I’m also watching badly oversold biotechnology names for signs of improvement. BridgeBio Pharma (BBIO) is turning up nicely. My top name remains Xeris Biopharma (XERS), which jumped more than 7% to its highest close in years. It has traded comfortably above its 50-day and 200-day moving averages through all the turmoil, and that is the kind of relative strength I’m looking for as third-quarter reports approach.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre was long AMZN, BBIO, XERS and SPCX.
