Warsh Jitters and Big Tech Rerating Fuel Market Turmoil
Investor uncertainty climbs on expectations of a more inflation‑focused Fed under Kevin Warsh, Apple’s margin warnings and an AI‑sector rerating.
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The market is in turmoil on Friday morning as President Trump prepares to nominate Kevin Warsh as the next chair of the Federal Reserve. While Warsh is viewed as a mainstream candidate who will support the Fed’s independence and dual mandate, he is regarded as more hawkish than other candidates.
Bond yields are rising, the dollar is stronger, precious metals and Bitcoin are lower, and odds of rate cuts are falling. There is concern that the Fed under Warsh will prioritize combating inflation, which could harm economic growth.
Investors aren’t sure what to make of this choice. There is likely to be some greater clarity once Trump announces his choice and there is an opportunity to hear from Warsh, but the initial reaction is uncertainty and some pessimism, and that is pushing some folks to the sidelines.
Warsh was originally appointed to the Fed Board of Governors in 2006, when he was just 35 years old, making him the youngest person ever appointed to the Federal Reserve Board. He is married to Jane Lauder, the granddaughter of Estée Lauder, who is an executive at the cosmetics giant.
Apple and the Margin Headwind
The other issue impacting the market on Friday morning is Apple’s (AAPL) earnings. iPhone sales were very strong, and the company easily surpassed expectations for both revenue ($143.8 billion vs. $138.5 billion expected) and EPS ($2.84 vs. $2.67 expected).
Apple also raised guidance; however, warnings about margin pressures and supply constraints caused the initial gains to reverse. Apple is indicated lower by about 1%.
The Great AI Rerating
The Apple report does little to clarify the problem highlighted by Microsoft's (MSFT) earnings. Microsoft was hit for a 10% loss Thursday after indicating that AI profitability was not as robust as hoped and that capital spending was proceeding at high levels.
Investors took some solace in Meta's (META) earnings report, which indicated that AI spending was producing enhanced advertising revenue, but the entire AI sector is undergoing a rerating as investors punish software-related AI and reward advertising- and promotion-related AI.
Tactical Game Plan
While there were pockets of very poor action in software stocks on Thursday, breadth was solid, and there was a late rebound. There was more rotational action and underlying support, but this was offset by weakness in large-cap technology.
The action looks very chaotic on Friday morning as investors try to sort out the news flow. I will be looking for pullbacks in some of my preferred stocks that are under pressure, primarily due to index and ETF selling.
This type of market action is largely driven from the top down as institutions sell indexes, ETFs, and baskets of stocks rather than individual names. This pressure affects many smaller stocks, regardless of their individual merits, and can create favorable entry points. That is my focus in the current environment.
At the time of publication, Rev Shark was long GOOGL.
