đIs the Tech Rout Over?
Next week determines the market's new direction
Welcome back to MktContext where we study the US economy and time the stock market.
Current market timer: HOLD
Weâve just witnessed one of the biggest momentum unwinds in a generation, yet major indexes mask it. SPX is down just -1.5% from the highs and remains positive year-to-date.
Underneath the surface, things change dramatically. Many of the AI stocks that led the bull rally have fallen from grace. Nasdaq and chip stocks are in a substantial drawdown that wiped out tremendous wealth for institutional and retail investors alike.
Our switch to RSP (equal-weighted SPX) in early July was well timed. RSP has continued to make new highs even as QQQ, SPX, and now IWM rolled over. It speaks to the rotation progression and change of leadership. But if the SPX and QQQ regain leadership, we will not hesitate to switch back into those major indexes.
For now, we are watching for a potential rebound in the indexes. Next week holds the secret to the marketâs future direction. We use our market-timing signals to determine whether the next phase of the rally is officially starting.
Mag 7 earnings
Several of the Mag 7 reported earnings this week, giving us insight into the AI investment cycle. Letâs start with the good news first.
Microsoft (MSFT) delivered excellent cloud growth, the fastest growth since 2022. This is expected to accelerate as demand outstrips supply; a great read-through for the rest of the AI complex. Despite higher capital investment, they expect to remain cash-flow positive â meaning they donât need debt or equity to finance projects. Music to investorsâ ears.
Investors were also delighted to hear that users of Copilot (Microsoftâs AI model) are willing to pay for it. There was previously doubts that enterprise clients would expand or renew licenses after initial trial pilots. Microsoft is even adding usage-based billing for heavy agentic tasks. What this means is that AI providers are capturing more of the economics from customers deploying highly productive AI.
MSFT stock was up nearly 20% on the week. This just goes to show that the hyperscalers have a pathway to higher stock prices if they can demonstrate good return on investment (ROI) to validate the massive infrastructure spend.
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AMZN, META earnings
FOMC meeting
Technical analysis points to indecision
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