Here's the Bears' Big Mistake as Investors Await the Fed and Major Earnings
This is my game plan and what to watch with 7000 in sight for the S&P 500 and results for Microsoft, Meta and Tesla on tap.
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On Wednesday morning, investors are awaiting the Federal Reserve interest rate decision and earnings reports from several Magnificent Seven (MAGS) members.
The senior indexes have been running higher, and the S&P 500 is trading at a new all-time high in the premarket. The 7000 level is in sight after closing at a record 6978 Tuesday. There has been some rotational action out of smaller stocks, with big-cap technology regaining its leadership role.
The Recurring Sell-the-News Narrative
We have seen this movie before. There's been a similar setup at various times in the last couple of years. Sometimes it has been due to earnings, and other times to optimism about economic data, the Fed, or tariff news.
Rather than embrace the momentum and look for the market to keep running higher on positive news, the bears keep making the same mistake. The mistake is to look for a "sell-the-news" reaction.
The theory is that the good news is already fully discounted. That Stocks are overvalued and extended, and rather than continue to chase them higher, market participants will sell into the strength, and there won’t be buyers to keep the uptrend running.
Why Logic Fails the Bears
Predictions of a sell-the-news reaction have been consistently wrong. While the argument appears logical and even compelling, it has not worked. Part of the reason is that the bears are underestimating the buying power investors still have. The resilient economy, a somewhat dovish Fed, and increased productivity driven by AI are giving the bulls plenty of ammunition.
The bear’s argument that stocks are expensive, AI is a bubble, inflation and tariffs are too high, and the political situation is a mess, falls on deaf ears. The bulls are focused on what is working and have been living in a world filled with "fear of missing out" for years. They are unconvinced by valuation arguments and are very aware at how economists have underestimated the strength of the economy
A Lame Duck Fed?
The Fed decision on Wednesday will likely be less important than typical. It is expected that the central bank will not make any significant changes to monetary policy.
Fed Chair Jerome Powell is effectively a "lame duck" as his term ends in May, and the Trump administration has already signaled a move toward appointing a successor who may embrace lower interest rates. There won’t be any big surprises from the Fed today, and that is a market positive.
Earnings Risks and Technical Overhang
Earnings tonight from Microsoft (MSFT) , Meta (META) , and Tesla (TSLA) pose greater risk. These stocks have run up over the last six or seven sessions and are hitting some technical overhead. Expectations have increased, but there are concerns about capital spending levels, AI integration, and higher efficiency.
Here is what investors are looking for tonight:
- Microsoft: Analysts expect adjusted EPS of $3.91 to $3.93 on revenue of roughly $80.3 billion. The focus is on Azure growth and whether the massive capex is driving bottom-line results. Notably, D.A. Davidson recently upgraded the stock to Buy with a $450 target, citing a more rational AI spending strategy.
- Meta Platforms: The consensus is clustered around $8.21 EPS and $58.4 billion in revenue. Investors are seeking clarity on 2026 spending plans, as fears of a "capital inferno" remain a primary bear talking point.
- Tesla: Tesla faces the steepest hurdle with EPS expected to fall nearly 40% year-over-year to $0.44 or $0.45 on revenue of $24.8 billion. While automotive margins are under pressure, bulls like Dan Ives at Wedbush maintain a $600 target, banking on updates to Robotaxi and Optimus.
Any indications that investment in AI development is slowing, or that margins are contracting faster than feared, will likely have a negative impact.
My Game Plan
What investors have to watch for is how much support these stocks have on a pullback. Typically, there have been very aggressive dip buyers when there is an initial sell-the-news response to the earnings.
I’ll be closely monitoring my positions and looking for trading opportunities in individual stocks amid elevated volatility. I remain unconcerned about a potential market top but expect some choppy action.
Will bears be trapped again by a failed sell-the-news reaction?
At the time of publication, Rev Shark had no positions in any securities mentioned.
