AI-Related Earnings Send Mixed Signals To S&P 500

S&P 500 Digests Earnings Reports

As predicted in our previous post, the FED rate cut announcement last Wednesday was a sell-the-news event in the S&P 500.

The announcement on Thursday of a US-China trade deal did little to limit the correction, likely due to the lack of detail.

As noted in our previous post, earnings reported last week, particularly the mega-cap AI-related earnings, would likely shape market direction.

Microsoft beat revenue expectations by $2 billion. They made a net profit of $28 billion on revenue of $78 billion.

Meta’s free cash flow fell from $43 billion to $20 billion, and net income, adjusted for a one-time tax, decreased by 2.3% year-on-year to 38.6%.

Both Microsoft and Meta saw their stock prices fall after their earnings reports.

The catalyst for the losses was likely newly announced plans from both companies to spend even more on AI in the next year, despite the significant capital they have already poured into the AI race.

In contrast, both Google and Amazon saw their stock prices rise after earnings.

Free Cash Flow

In the last 12 months, the free cash flow for Meta, Microsoft, Amazon and Google has dropped $70 billion. They’ve returned $3 billion in revenue on that investment.  

That raises questions about the profitability of those investments.  

Confidence in the AI trade is looking increasingly fragile.

The social media narrative about a stock market bubble remains strong as investors assess massive gains in AI-related tech stocks.

The S&P has returned 18% in the last 12 months. Google has returned 59%, Nvidia 43%, Meta 30%, Microsoft 27% and Amazon 22%.

Last week, Nvidia hit a market cap of $5 trillion. Just 78 days since Nvidia achieved a market cap of $4 trillion.

That said, investors are also aware that AI monetisation plans remain unclear.

S&P 500 Key Levels

While the S&P 500 closed at a new all-time high, it failed to close above the major technical trendline and the options’ high level at 6840 that we highlighted in our previous post.

From a technical perspective, momentum remains weaker than that seen at the last all-time high.

To add to the mix, the treasury general account (TGA) build, coupled with the government shutdown, has restricted liquidity to the market.

The balance of probability suggests investors should expect choppy consolidation this week.

That said, an end to the government shutdown and a confirmed close above 6840 could provide momentum to the upside.