The recovery in Big Tech and pockets of positive earnings have stabilized investor risk appetite, as investors wait to see whether the Fed’s most recent minutes will validate their expectations of a rate cut later this year.
Wednesday morning, U.S. stock futures were pointing higher, as investors began to rotate back into Technology after a difficult period, particularly hard on Software and AI-related names. Treasury Yields were hovering near historic lows, and investor confidence had increased as volatility measures decreased and “dip buying” had resumed in Mega-Cap and Semiconductor names, which were contributing to an increase in all Index futures, although investors were concerned that Corporate spending on AI may peak before it accelerates.
Several pre-market movers included: Analog Devices had a very strong earnings and guidance report, which contributed to a large rally in chip-linked stocks; Garmin had a great earnings report and outlook, and therefore its stock price surged. However, not all tech bellwethers participated in the rally, as Palo Alto Networks declined amid investor focus on forward profitability issues related to the company’s results.
The AI Trade continued to dominate the tape. The shares of NVIDIA (NVDA) rose amid increased deal chatter and renewed demand signals, which contributed to the growing consensus that Hyperscalers continue to prioritize the purchase of High-End Graphics Processing Units (GPUs), as buy-side skepticism regarding the sustainability of AI capital expenditures (capex) grows. This is increasingly creating a bifurcation in the market between companies with near-term monetization and those being priced for much more aggressive adoption curves.
Outside the United States, European and Japanese markets traded higher in a thin Asian session, as many markets closed for the Lunar New Year holiday. Commodity prices also strengthened — adding another variable to inflation expectations and the timing of central bank actions. For equity investors, the near-term focus is whether the rally will expand beyond a few AI winners. While price action indicates that investors are willing to re-engage so long as rates remain contained, and there is sufficient “real economy” follow-through in terms of earnings to support the use of premium multiples in the growth complex.
