(Oct 29): A rally in the world’s largest technology companies sent stocks to all-time highs amid speculation that artificial intelligence (AI) will keep driving earnings for the group that has powered the bull market.
While most shares in the S&P 500 took a breather after a torrid run, tech megacaps kept rising. Microsoft Corp finalised a new pact with OpenAI that will give the software giant a 27% ownership stake worth about US$135 billion. Apple Inc briefly topped US$4 trillion while Nvidia Corp chief executive officer Jensen Huang dismissed concerns about an AI bubble.
On Wednesday and Thursday, five big techs accounting for about a quarter of the US equity benchmark are due to report results. Investors will be looking for assurances that the billions of dollars for computing infrastructure will continue — and ultimately pay off down the road.
“This group has repeatedly reassured investors that the AI theme is alive and well, and given the number of deals that have been announced over the past few months, it seems likely that this narrative will continue so long as Wall Street rewards them for this approach,” said Bret Kenwell at eToro.
Also buoying sentiment were bets the Federal Reserve (Fed) will cut rates on Wednesday, with traders hoping for clarity as to when officials will stop shrinking the central bank’s portfolio of securities. Bets have grown they may end quantitative tightening as soon as this month.
That’s all hapenning ahead of President Donald Trump’s Thursday meeting with his Chinese counterpart Xi Jinping. The Wall Street Journal reported the US would roll back some tariffs if Beijing cracks down on the export of chemicals that produce fentanyl.
See also: S&P 500 rises as traders await earnings show-and-tell, rate cut
The S&P 500 closed just shy of 6,900. A gauge of the Magnificent Seven megacaps climbed 1.3%. The yield on 10-year Treasuries was little changed at 3.97%. The dollar fell.
The Magnificent Seven group is projected to deliver profit growth of 14% in the third quarter, according to data compiled by Bloomberg Intelligence. That’s nearly twice the 8% expected profit growth for the broader S&P 500, but it also would be the slowest pace since the first quarter of 2023.
However, big techs have a history of reporting earnings that far exceed Wall Street estimates. And that’s what many investors are counting on.
See also: Stock bulls see S&P 500 rising above 7,000 as momentum builds
“We expect another strong round of megacap tech earnings reports, given the relentless demand for AI technology and infrastructure,” said Clark Bellin at Bellwether Wealth. “While profitability in AI remains an unknown, investors for now are willing to overlook this as the AI arms race heats up.”
The stock market’s record highs leave little room for disappointment when it comes to big tech earnings, according to Paul Stanley at Granite Bay Wealth Management.
“Given how so much of the S&P 500’s market cap consists of Magnificent Seven names, if any of these earnings reports disappoint, that could cause a selloff or keep the market range-bound for the foreseeable future until we see the next catalyst,” he said.
Instead of dreaming about AI’s future, investors are now becoming more skeptical about how much cash these companies are tossing at AI projects that may or may not work out, according to Callie Cox at Ritholtz Wealth Management.
“Can these companies afford that massive bill? Of course they can. We’re far from the tech bubble days. But at what cost?” she said.
Cox noted that the five biggest hyperscalers will spend US$450 billion on capital expenditures, according to projections.
“Tech is Corporate America’s golden child. They’re known for quality balance sheets and wide competitive moats. Their AI pursuits could threaten these labels at a time when tech companies need to be near perfect,” she said.
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She also noted the gap between S&P tech company profits and stock prices is historically wide.
“A dynamic that can persist for a while, but raises the chances for disappointment,” she said.
In fact, tech remains among the most-crowded sectors. Nasdaq 100 positioning has increased significantly as investors add new long risk, reversing the fading momentum seen in recent weeks, according to Citigroup Inc strategists.
As for the S&P 500, the Citi team led by Chris Montagu wrote that US$2.7 billion of risk was added to the benchmark, through a mix of short covering and new longs.
“The markets are once again pressed into overbought/extended territory,” said Dan Wantrobski at Janney Montgomery Scott. “We remain on high alert for a correction in the magnitude of 5% to 10% before 2025 closes out.”
Still, Wantrobski also noted that November overall has historically been one of the best months for US equities, per the Stock Trader’s Almanac.
While Commodity Trading Advisors are “max long the Nasdaq,” it would take a “decent sell-off” to below 23,900 points before they turn sellers, according to UBS strategists led by Nicolas Le Roux. The gauge closed slightly above 26,000 on Tuesday.
“An increasing number of investors are growing concerned that the strong stock gains seen over recent months may have outpaced fundamentals, at least in the very near term,” said Anthony Saglimbene at Ameriprise. “This week’s Magnificent Seven earnings reports provide a chance for companies to either confirm or challenge that view.”
Speaking of size, he noted that at no other time over the last 35 years have the top 10 companies by market-cap in the S&P 500 held so much influence on one of the broadest measures of the US stock market.
“The Mag Seven is well positioned to meet profit expectations,” he noted. “However, given current valuations and the size and influence these companies currently hold over the broader market, it’s their outlooks and views on profitability moving forward that will likely carry the most sway with investors this week, and probably beyond.”
“The AI-driven capital expenditure trade remains the most critical factor to watch. Any disruption in that area could unwind an index that has become increasingly dependent on sustained spending,” according to Ryan Grabinski at Strategas.
While valuation often emerges as a primary concern among investors, the 50 largest S&P 500 companies trade at forward multiples below 50 — whereas at the market peak in March 2000, many companies traded well above that level, he noted.
“While it’s certainly hard to argue that the market is cheap or to expect further multiple expansion to drive returns next year, companies today are far more profitable and fundamentally sound than in the early 2000s,” Grabinski concluded.
Citadel Securities’ Scott Rubner said the US stock market appears primed to extend its record-setting run — and maybe even accelerate its usual year-end gains.
He cited the so-far strong earnings season, bullish individual investors, and over US$7 trillion in money-market funds that may be shifted off the sidelines as yields come down. On top of that are the seasonal factors that tend to push up stocks as the year draws toward a close.
Equity bulls are lining up to wager the S&P 500 will surge past 7,000 now that it looks as if a seasonal bout of volatility has passed. While that optimism will get a stiff test this week, if stocks can weather that stretch, seasonal factors look beneficial.
The final weeks of the year tend to favor risk assets. In data back to 1985, the Nasdaq 100 has averaged an 8.5% gain from Oct. 20 through year-end, while the S&P 500 returned 4.2% on average, according to Goldman Sachs Group Inc’s trading desk.
“To send the S&P 500 north of 7,000 this week, we’ll likely need positive outcomes from the Fed, strong Magnificent Seven earnings alongside buoyant outlooks and progress in cross-border relations between Washington and Beijing,” said Jose Torres at Interactive Brokers.
While there’s room for disappointment, if only two out of the three developments are favorable, we could have enough momentum to reach the important 7,000 milestone before November, Torres noted.
Uploaded by Isabelle Francis
