Oracle's Flop and Dovish Fed Send Market Spinning
Now the question is whether AI will weigh on the entire market, or trigger more intense rotation into areas with favorable valuations and better technical setups.
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A poor earnings report from Oracle (ORCL) reignited concerns about AI valuations and raised questions about the profitability of hyperscalers' massive infrastructure spending. The S&P 500 has already recovered close to 50% of its overnight losses, but the action is triggering increased rotation as investors look to areas likely to benefit from Fed Chair Jerome Powell’s dovish comments on Wednesday.
Investors were expecting a "hawkish cut" on Thursday with the likelihood of some hedging about the path of future rate cuts, but Powell was surprisingly upbeat about the health of the economy and sent the message that the Fed is on the right track and expects a meaningful drop in inflation in the second half of 2026 as well as a fairly healthy economy, despite slowing in employment.
The Oracle report undermines the positive sentiment created by Powell, but the market has already been undergoing a rotation out of many of the AI names as competition in the group heats up. AI is no longer a monolithic leader as investors are now trying to sort out winners from losers. It is obvious that it will take more than massive investment in data centers to produce financial success.
The question now is whether the confusion in the AI sector will weigh on the entire market, or will it trigger more intense rotational action into the areas of the market that have favorable valuations and attractive technical setups.
The Russell 2000 (IWM) has been leading market action recently and produced a clear breakout move on the Fed decision on Wednesday. Smaller stocks tend to carry more debt and are more interest rate sensitive, so the group likes the dovish tone set by Powell.
I was looking for a potential dip on the Fed news on Wednesday, which didn’t occur, but now we have the dip on the Oracle news, and we are seeing the dip buyers I was looking for. It is not ideal that the AI sector is under pressure again, but it does remove some of the negative talk about bubbles and refocuses investors on fundamentals and profitability.
This will continue to be a good environment for stock pickers, but the most important issue will be to stick to strong sectors and themes and focus on unextended charts and reasonable valuations.
At the time of publication, DePorre had no position in any security mentioned.
