The Nasdaq Correction Unveiled
The tech-dominated Nasdaq index, known for its strong connection to interest rate fluctuations, has experienced a significant 23% drop year-to-date. The presence of heightened geopolitical uncertainties and surging Treasury yields has left investors in search of promising stock performance, particularly from tech giants that once held great potential. However, recent Big Tech earnings have not lived up to expectations.
Mixed Bag of Big Tech Earnings
Amazon (AMZN) managed to surpass both revenue and profit expectations, but its cloud revenue fell short of analysts’ projections, reporting 12% year-over-year growth. Similarly, Alphabet (GOOG, GOOGL) posted earnings and revenue beats but disappointed in the cloud segment, reporting $8.41 billion in revenue compared to the expected $8.6 billion.
Microsoft (MSFT), on the other hand, emerged as an exception, exceeding expectations in both revenue and cloud performance, particularly in its Azure business.
Meanwhile, Tesla (TSLA) fell significantly short of Wall Street estimates, and Apple (AAPL), set to report next week, has witnessed a slowdown in device sales in 2023.
Meta (META) beat estimates but provided a conservative Q4 outlook, citing geopolitical instability, a sentiment shared by Snap (SNAP).
The Reliance on Mega-Cap Tech Stocks
Interactive Brokers chief strategist Steve Sosnick pointed out, “The good thing about top-heavy market-cap weighted indices is that they perform excellently when their biggest components do well; the bad thing is that they perform very poorly when those stocks don’t.”
It’s not that these earnings were a complete disappointment, but they served as a reality check for a market that had grown overly optimistic about artificial intelligence. Nevertheless, Amazon’s stock has surged by over 50% year-to-date, while Microsoft’s stock has climbed nearly 40% in the same period.
Challenging Macroeconomic Environment
The macroeconomic landscape is becoming increasingly demanding. Elevated interest rates are driving up capital costs, making traditionally safer investments like CDs more attractive. Consumers are grappling with resumed student loan payments, rising gas prices, approaching 8% mortgage rates, and persistent inflation.
Furthermore, the full monetization of artificial intelligence, although promising in the long run, remains a work in progress. Oracle (ORCL), for instance, faces high demand for its AI services but struggles to acquire enough Nvidia (NVDA) chips for training and deployment.
This challenge extends beyond Oracle and affects Alphabet, Microsoft, and Amazon, all of which collaborate with Nvidia. Amazon’s CEO Andy Jassy has expressed a desire to further monetize its cloud service AWS.
Investment Perspectives: Long-Term vs. Near-Term
For long-term investors, these market fluctuations should not be a cause for concern. Will Rhind, CEO and founder of GraniteShares, noted that “Interest rates are most likely at the top of the cycle, and the economy is still in pretty good shape.”
In contrast, those with a nearer-term view should resist the urge to blindly follow the crowd. According to Ivana Delevska, founder and CIO of Spear Invest, during turbulent times like these, it’s crucial for investors to focus on quality companies that demonstrate growth and earnings sustainability.
Quality Amid Volatility
Not all market movements are equal, and quality companies like Google may find themselves caught up in the turmoil, despite strong fundamentals. In Nasdaq corrections throughout history, crucial moments, such as the dot-com bubble burst in 2000 and the onset of the COVID-19 pandemic, have played a significant role.
Sosnick emphasized the importance of broad market rallies over narrow ones, as the latter can lead to market struggles when money fails to shift from leaders to laggards. When capital exits both the market and the leaders simultaneously, it poses a serious problem, a scenario witnessed during this week’s events.