The Stock Market Is at a Critical Juncture
The Magnificent Seven is pulling back sharply, but is it a top or just a much-needed correction?
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Markets around the world are trading lower on Friday morning following an announcement that the Trump administration is raising tariffs on dozens of countries that have failed to make a trade deal. Canada will see an increase in tariffs to 35% but Mexico has 90 days to make a deal.
The tariff news creates new uncertainty and also raises the risk of inflationary pressure. In its earnings report on Thursday night, Amazon AMZN was unable to provide clear guidance as to how tariffs would impact its giant retail sales operations. Some of the tariffs will be eaten up by margin compression, but some are likely to be passed through to consumers. Although Amazon posted fairly strong revenue and EPS numbers, the uncertainty about tariffs has driven down the stock more than 7% in early trading Friday.
Apple AAPL also reported earnings and is up less than 2%. While sales were good, they were driven to some degree by front-running of tariffs. There is still concern that Apple is running behind in the development of an AI strategy.
With all the Magnificent Seven, except for Nvidia NVDA, reporting, there are few potential catalysts to drive the stocks. The good news is that the main theme of the reports, a tremendous surge in capital spending to support AI, will continue. This will help the chip sector, data centers, and power providers, but the big unknown factor is the extent to which the AI boom is already priced into these stocks that have been ripping higher for so long.
The indexes are at a critical juncture as they digest earnings, the recent Fed decision, tariffs, and economic data.
Meanwhile, the July jobs report will be issued on Friday morning and is expected to show some slowing in growth. One reason the Fed has not cut rates is the belief that the employment market remains strong. While there is a slowdown in the number of jobs, there is also a slowdown in the supply of labor, due in part to the crackdown on illegal immigration.
The price action of the indexes has been intraday weak for five straight sessions now, with intraday weakness in the S&P 500. The prevailing theme during the rise off the April lows was intraday strength and strong closes. That is shifting and is a notable change in character. The weak open on Friday will be an important test of dip buyers who were extremely frustrated for weeks because there was so little weakness. Will they still be willing to grab stocks on pullbacks?
The Magnificent Seven ETF MAGS is indicated 2% lower on Friday morning and has given back all the gains created by the blowout reports from Meta META and Microsoft MSFT. Is this a top for the market leaders or just a much-needed correction?
At the time of publication, Rev Shark was long META and NVDA.
