Key Earnings See Negative Reactions as Rotation Hits a Bump in the Road
SpaceX spent more, Tesla spent less, and Meta proved its spending works. The market is selling all three.
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It is ugly out there Thursday morning. Nasdaq 100 futures are down about 1.6%, threatening to erase much of this week’s gain, and S&P 500 futures are off about 1%. Tech is leading the decline, and selling is broad. Europe and Asia are deep in the red, and Chinese stocks are now in a bear market, with the CSI 300 down 20% from its June high.
The big question entering earnings season was whether solid numbers would produce sustained buying. The initial answer appears to be no.
Nothing Is Good Enough
SpaceX (SPCX) beat handily, raised guidance, and nearly doubled its spending plans. The stock popped and then faded, and it is down Thursday morning.
Meta Platforms (META) beat and showed evidence that its AI investments are starting to pay off, and the stock fell anyway after a sharp spike higher.
Tesla (TSLA) was up about 3% after hours on an earnings beat, then gave it all back and more. It cut its capital spending plans because limited battery supply is holding back production.
More spending, proof the spending is working and less spending all got the same reaction. The problem isn’t any one report. The market is skeptical of the whole AI growth story and is using earnings as an opportunity to reduce exposure.
Chip equipment maker Lam Research (LRCX) added to the pressure with a disappointing outlook that has the stock down more than 7%. Nvidia (NVDA), Intel (INTC), Micron Technology (MU) and CoreWeave (CRWV) are all lower in premarket trading.
The primary issue isn’t just heavy AI investment. The issue is return on those massive investments. Investors want proof that the spending is producing growth and earnings, and they want to see it now, not in 2028.
Hedge Funds Are Unwinding
The major market theme in the last few weeks is the unwinding of AI-related positions by hedge funds, and there are no signs that it is about to stop. That fits with the aggressive degrossing we saw hit biotech earlier this month. When hedge funds reduce exposure, they sell what they own most of, and right now that is AI.
We also have a quiet period ahead. Microsoft (MSFT) and Alphabet (GOOGL) don’t report until the middle of next week, so there isn’t an obvious catalyst to turn sentiment in the meantime. That puts oil back at the center of attention.
Oil and the Gulf
Brent crude is back up and approaching $112 a barrel, its highest level since May, after the State Department ordered some diplomats to leave Saudi Arabia because of the threat from Houthi militants. The Wall Street Journal also reports that the U.S. and Israel are planning renewed attacks on Iran. Higher oil keeps inflation worries alive, and that is the last thing this market needs.
Bonds are once again acting as the safe haven. Treasuries are rallying, and the 10-year yield is down about six basis points. The one outlier is France, where a spiraling debt crisis has pushed borrowing costs to multi-decade highs.
Game Plan
As I wrote last night, the gap between the two tiers of this market is not going to close in a straight line. It is going to be a bumpy ride, and Thursday morning we have a bump. Everything is being dragged down early, but the big question remains the rotation between the two tiers. If the laggards hold up better than the AI names as the day goes on, the rotation is still intact even on an ugly day. If everything sells off together, it is a broader flight from risk.
I’m still having a hard time finding charts that I want to buy. Action like we have Thursday morning will help to advance the technical setups, because the selling has to run its course before stocks can build bases and offer logical entry points. But it is going to take time for that to develop, and I’m not going to rush it.
At the time of publication, Rev Shark was long SPCX.
