Meta, Microsoft Blowout Reports Distort the Health of the Overall Stock Market
Concentration in the AI giants is becoming even more extreme, covering up what the average stock is doing.
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The market mood turned gloomy on Wednesday afternoon after Fed Chair Jerome Powell delivered a more hawkish message than many investors had anticipated. Powell refused to bow to the pressure on him created by President Trump and stuck to the position that more economic data is needed before the Fed can be comfortable with a rate cut.
While Powell views the employment picture as quite healthy, there is still a strong belief that it is just a matter of time before tariff-driven inflation will start to show up in the data. The fact that it hasn’t so far is explained in a variety of ways, but now that a number of substantial trade deals are in place and there are likely to be few delays beyond the August 1 deadline, the economic impact will soon become clear.
The market mood was miserable at the close, but was completely reversed by stellar earnings reports from both Meta META and Microsoft MSFT. Both companies far exceeded expectations, but, most importantly, they signaled a substantial expansion in capital spending as they race to dominate the AI industry.
The AI industry and the Magnificent Seven MAGS stocks in particular are dominating economic growth and render the fuss over the Fed and interest rates nearly meaningless. A cut in interest rates would be nice, but when you have this level of growth in mega-cap technology names, it isn’t that important.
All eyes will now be on the earnings reports from Amazon AMZN and Apple AAPL after the close on Thursday night. It is unlikely that these reports will blow the doors off like the Meta and Microsoft results, but the potential for positive surprises is very high.
The primary challenge for investors at this point is dealing with a bifurcated market. The Magnificent Seven names dominate the indexes, and there is still tremendous demand for these stocks. But they cover up any weakness in thousands of other names and in other areas of the market.
The business media does a very poor job of distinguishing between the strength of the indexes and the health of the overall market. The risk of deeper corrective action in many stocks is increasing, and the great likelihood is that it will be covered up by the strength of Meta and Microsoft.
Microsoft has added about $300 billion in market cap after its earnings, which is more than the value of 475 of the stocks in the S&P 500. Concentration in the AI giants is becoming even more extreme and greatly distorts what the average stock is doing.
We have some economic data coming up, but the only thing that really matters is how willing investors are to chase Microsoft and Meta even higher.
At the time of publication, Rev Shark was long META.
