Will Investors Rotate or Run as the AI Reset Gains Traction?
Amazon ($AMZN) is leading a parade of disappointing earnings reports Friday morning. The damage is mostly in AI and technology stocks, including Intel ($INTC), Sandisk ($SNDK), Reddit ($RDDT), Roblox ($RBLX) and Twilio ($TWLO). The AI reset has been running for a couple of months and is gaining traction. The key issue now is how much this rebalancing pushes money into other parts of the market.
On Thursday, the Invesco QQQ Trust ($QQQ) dropped 1.4% while the iShares Russell 2000 ETF ($IWM) rose 1% and breadth was positive. Friday morning the QQQ is indicated down 2.3%, and the IWM is down 0.6% with breadth looking much worse.
Intense weakness in tech can scare investors away from the market and push cash to the sidelines rather than into other sectors. We’ll have to watch breadth and sector performance carefully today to see which one is happening.
Amazon Wants a New Story
Amazon is going through the same struggles we have seen with Meta Platforms ($META) and Alphabet ($GOOGL). It is spending a huge amount of money, cash flow is tight, and it didn’t deliver the revenue and earnings beats that might have bought it more positive investor sentiment.
What management announced on the call is a surprising change in its focus. As Gene Munster of Deepwater Asset Management pointed out, Amazon wants Wall Street to think of it as an AI data center and chip company. “Forget retail,” he wrote. Amazon Web Services, its cloud business, grew 39% last quarter, and management took the unusual step of forecasting more than 40% growth in both 2027 and 2028. It normally gives a forecast only one quarter out. It also said AWS will be a trillion-dollar business in five to 10 years. Wall Street currently expects about $306 billion in 2028.
That is a bold attempt to change the conversation. Thursday I wrote about the risk that AI shopping assistants pose to Amazon’s retail business. Management’s answer is to point investors toward the cloud, where AI is a tailwind instead of a threat. It is similar to what Oracle ($ORCL) did at its investor day this week, when it laid out a long-term roadmap and the stock jumped.
The difference is that Oracle told investors when the spending would peak and when the cash would come back. Amazon is offering a big number years down the road.
Two weeks ago I wrote that valuations built on predictions work only if investors don’t start to question the predictions. Right now, the market is concerned about immediate profitability and is skeptical about targets that are five to 10 years away.
Oil and Bonds
Adding to the problems this morning, the United States Oil Fund ($USO) and the United States Brent Oil Fund ($BNO) are hitting new highs. Bonds are ticking higher as investors look for a safe haven. It is also the last trading day of the month, so expect some movement due to positioning and window dressing.
Game Plan
My game plan is to stay focused on the rotational action. Many smaller companies report earnings over the next two weeks, and that is going to create plenty of movement. I’m looking for post-earnings opportunities in smaller names with developing charts. I have no interest in trying to bottom fish the technology names.
The one big-cap tech name I’m looking to add more of is SpaceX (SPCX). Keith Fitz-Gerald of Fitz-Gerald Group told CNBC that SpaceX is the “single most undervalued opportunity on the planet.” He contrasted it with Anthropic, which he called a potentially generational opportunity, but one with significant risks around its technology. I don’t need someone on TV to tell me what I like about SpaceX, but it is good to see others recognizing what it offers.
At the time of publication, Rev Shark was long AMZN and SPCX.
