Amazon Stumbles But Will it Push the Rotation Further?

Amazon (AMZN) dropped as much as 10% after hours after missing on both the top and bottom lines, but it is bouncing after some initial panic and is now down about 7%, trading around $227. Earnings came in at $1.89 per share, below the $1.96 consensus, and revenue of $201.9 billion was slightly under estimates. The outlook didn’t help. Amazon expects fourth-quarter revenue of $240 billion to $247 billion, which brackets the $244.17 billion consensus, but the midpoint comes in slightly below it. 

Investors that have grown use to beat-and-raise quarters are selling first and asking questions later. The earnings miss looks worse than it is. Net income fell to $20.7 billion from $21.2 billion a year ago, but Amazon says that is mainly because last year’s third quarter included $9.5 billion of one-time gains on its investment in Anthropic. Without that, earnings grew, and sales rose 13% from a year ago, excluding currency effects.

But the market isn’t in a mood to give anyone the benefit of the doubt. Gene Munster of Deepwater Asset Management warned earlier on Thursday that Alphabet’s (GOOGL) results were a warning sign for Amazon. AI is changing how people find things. If people ask an AI assistant to find what they want to buy instead of starting on Amazon, the company loses the position that makes its retail business so powerful. Munster sees that threat building starting in the second half of 2027, so it won’t show up in the numbers for a while. But after Alphabet, investors have little tolerance for uncertainty. The bounce off the initial low suggests some of them have already started sorting.

Will it Push Rotation Further?

The question now is whether this poor report helps the rotation gain more steam. Over the past two days, Alphabet and Amazon have both been hit hard, Microsoft (MSFT) gave back its post-earnings gap, and Meta Platforms (META) is still searching for support a week after its report. The money coming out of these names has to go somewhere, and so far a lot of it has been going into the rest of the market.

You can see it in the new highs and new lows. On Thursday, there were about 160 new 12-month highs against 220 new lows. On October 14, the day of the hot inflation report, there were 75 new highs against 675 new lows. On Wednesday, it was 127 against 248. The lagging groups are starting to bounce while the leaders lag, and that is how the gap between the two tiers of the market closes.

Thursday’s action cooled as the afternoon went on, and breadth finished at 56% positive. The rotation is building, but it isn’t moving in a straight line. A weak Amazon report gives it another push, as long as the selling stays focused on the mega caps and doesn’t turn into a broader flight from risk.

Competition Inside AI

Growing concerns about AI capital spending and profitability are driving the rotation, but competition inside AI is also increasing. When Meta introduced its Muse AI agent, the stock got a boost. That reversed quickly as competitors announced agents of their own. A lead in a product like this doesn’t last long, and that makes the spending harder to justify.

Oil, Rates and Friday

Oil bounced back on Thursday, which didn’t help, while interest rates held steady. Friday is the last day of the month and also an options expiration, so we will likely see some position squaring that has little to do with the news.

Game Plan

The improvement in the new highs and new lows is the most encouraging thing I’ve seen in weeks. I still own some Amazon and will decide on Friday what to do there. It is unlikely that I will want to add at this point. My focus remains on the lagging stocks that are starting to attract the money coming out of the leaders and biotechnology (XBI) is a leading sector.

Have a good evening. I’ll see you tomorrow.

At the time of publication, DePorre was long AMZN.