Lower Expectations May Be Exactly What This Market Needed
Investors are in a better mood Monday morning. Oil is sharply lower after President Trump halted attacks on Iran over the weekend, and Tehran says it will hold its fire as long as the pause lasts. Oil has given back most of its war premium after topping $100 just last Thursday.
The chip sector is bouncing as well, probably on news that Nvidia ($NVDA) is in talks to provide a $250 billion backstop to OpenAI to fund a massive data-center project. It is also a good illustration that the AI buildout is not slowing down, and that helps data centers, chip stocks and other infrastructure plays.
Lower Expectations May Be the Good News
The most important development last week was the poor reactions to good earnings reports. Alphabet ($GOOGL) delivered some of its strongest growth in five years and fell into a bear market. IBM ($IBM) was punished. Intel ($INTC) gave back its initial gains. The market spent the week selling good news and sympathy moves dragged down most technology names.
That was painful, but the good news is that expectations have been reset. The traders who were positioned for perfection have been shaken out, the momentum crowd has reduced exposure, and the bar for this week’s reports is lower than it was a week ago. Markets do not bottom when the news gets better. They bottom when the worst has already been discounted.
Whether we are at that point is the question this week will answer, because the calendar is packed. Microsoft ($MSFT) and Meta Platforms ($META) report Wednesday, the same day the Fed delivers what is widely considered one of its least predictable decisions in a while. Apple ($AAPL) and Amazon ($AMZN) report Thursday.
Four Magnificent Seven reports and a rate decision in two days, with the capex question hanging over all of it.
The Capex Story Has a New Wrinkle
The spending worry is not going away, but it is evolving. The hyperscalers have borrowed more than $200 billion in bonds and loans this year with another $115 billion in announced equity raises, and the surprise bond sales from Nvidia and Amazon have pressured hyperscaler debt prices.
The capex concern started as a margin question. It is becoming a financing question, and the Nvidia deal with OpenAI, however bullish for demand, adds a layer of circularity that may be a concern to some investors. When the supplier guarantees the financing of its customer it creates an artificial boost to demand. This issue has come up in the past but evaporated as other concerns arose.
If Microsoft and Meta deliver and the reactions are better than what Alphabet received, the reset expectations did something positive and the market has room to recover. If good reports get sold again even after last week’s damage, that tells us the repricing is not finished and we are in for a tough slog.
Strategy
I am not chasing Monday morning’s gap. Monday strength in front of major binary events has been a trap twice in the past two weeks, and this week’s events are bigger. The pause in Iran is a pause, not peace, and the Fed on Wednesday is a genuine unknown.
My focus remains on the names on my shopping list and the setups developing outside of technology. The biotechnology group continues to act well although there is some unpleasant volatility. I will keep making incremental buys where the action is right. If the reports this week benefit from reset expectations and the reactions improve, there will be plenty of time to add exposure.
The gloom was thick on Friday. A better mood Monday does not resolve anything and may be a trap for the third week in a row, but lower expectations into big reports could be a game changer this week.
At the time of publication, Rev Shark had no positions in any securities mentioned.
