Tesla, Google, Other Mega Cap Earnings Disappoint, but Here's the Good News
The lack of upside surprise from major companies could help fuel the rotation into small cap stocks, offering traders more opportunities.
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Investors are not responding kindly Wednesday morning to big earnings reports from Tesla TSLA, Alphabet GOOGL, Texas Instruments TXN, and LVMH LVMHF. The numbers weren’t bad, but expectations were high, and there weren’t any major upside surprises. Google only beat revenue projections by 0.6%, which is the lowest "beat" in at least five years.
There will be plenty of analysis of the issues at Tesla and Google, but one of the main themes is that artificial intelligence still requires very costly investment, and there isn’t any great revenue growth from it so far. Management and analysts remain extremely positive about AI, but it will take time before its financial benefit is meaningful.
There are still some very major big-cap AI names that will report in the next few weeks, but we aren’t going to be seeing many reports about how many times the term “AI” is used on earnings calls. The Magnificent Seven names are still very solid stocks, but they are expensive, and the AI excitement has cooled off.
The primary question for investors and traders is whether lackluster big-cap technology action will help to fuel a strong rotation into the rest of the market.
The Russel 2000 small-cap stocks have performed relatively well recently, and in the last couple of days picked up steam again after a pause. The Russell 2000 fund IWM is indicated higher again very early on Wednesday morning, while the Nasdaq 100 QQQ is down over 1.2%.
There are a number of conditions that support this rotational action. First, the Fed is on the brink of cutting interest rates, which helps smaller stocks that are more leveraged to debts. Big-cap technology names have plenty of cash, and lower rates are actually a negative for them in some ways.
On Friday, the person consumption expenditure inflation report is out, and then next week, the Fed will announce its latest interest rate policy. If the PCE is soft, that will add further weight to the likelihood of a rate cut in September.
The other issue that benefits rotation into smaller stocks is that they are still very undervalued compared to their big-cap siblings. The Russell 2000 has underperformed for years as capital poured into the Magnificent Seven because their relative strength produced an aura of safety.
The Russell 2000 is still far from its all-time highs and has a huge gulf of performance to close before it even comes close to exceeding its 2021 highs.
Rotational action is a negative for the folks who focus on the major indexes, but it is a boon for traders who focus on stock pickers like me. I’m more optimistic about trading opportunities than I have been in a long time.
At the time of publication, DePorre had no position in any security mentioned.
