Will Amazon and Apple Repair Recent Market Damage?
Here's the key to the market right now.
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The market struggled on Thursday as it dealt with hawkish comments from Fed Chair Jerome Powell and poor responses to earnings from Meta (META) and Microsoft (MSFT) . The action deteriorated during the day, with the Russell 2000 turning red and only 35% of stocks in positive territory at the close.
After the recent market run and overbought technical conditions, a bout of profit-taking isn't too surprising. The market has needed a rest, and so far, this corrective action is fairly mild, although some of the names with the biggest gains have seen sizable pullbacks.
After the close on Thursday night, both Amazon (AMZN) and Apple (AAPL) posted solid reports and are set to open at new all-time highs on Friday. In addition, Bitcoin (IBIT) and crypto-related stocks are bouncing after a sharp selloff over the last three trading sessions.
Market players have been concerned about the level of AI spending by the Magnificent Seven (MAGS) names. Meta, in particular, has been ramping up its expenditures, and there is some skepticism about the long-term payoff.
Powell's comments about the likelihood of a rate cut at the December FOMC meeting have also created some headwinds. Treasury Secretary Bessent addressed the issue and stated, "This Fed is stuck in the past. Their inflation estimates have been terrible so far this year. They keep coming down, inflation keeps coming down, and their models are broken. And I'm just not sure what they're thinking here in terms of signaling that they may not want to cut rates at the December meeting. They've got a lot to answer for not only for this year but for many years past, both in their GDP estimates and their inflation estimates, which are consistently wrong."
Fed Fund futures still indicate a high likelihood of a rate cut in December, and there will be tremendous pressure on the cenral bank to maintain a dovish posture. If the mood about a rate cut shifts, it will become a tailwind rather than a headwind.
Earnings season is now shifting to smaller stocks. All the Mag 7 except for Nvidia (NVDA) have reported. There were indications on Thursday that dip buyers are picking up shares of Microsoft and Meta, and the solid news from Amazon and Apple is helping.
The key to the market right now is the level of underlying support as well as rotational action. The market does not need the Mag 7 to lead, but the group does impact sentiment because it is the primary focus of the business media. Other sectors may produce better results, especially if there are some good earnings reports in the next two weeks.
My game plan is to focus on aggressively trading small-cap earnings reports in the next two weeks. I believe that a selloff is not going to accelerate at this point and that dip buyers will hold things up. That should set the stage for some positive end-of-the-year seasonality.
Volatility will be elevated, and stock selection rather than index direction will be key.
At the time of publication, Rev Shark was long IBIT and NVDA.
