FX.co ★ Tech in stress: Stocks fall, chipmakers rise amid AI debate

US stock indices ended trading mixed on Tuesday, with the S&P 500 and Nasdaq falling under pressure from weak chipmakers and tech giants, while the Dow Jones Industrial Average showed a slight increase.

Microsoft missed expectations

Tech giant Microsoft, considered a leader in artificial intelligence, ended the day down 0.89%, reaching $422.92 per share. The company's shares fell another 5% in after-hours trading as quarterly results for its cloud service Azure fell short of analysts' forecasts.

Nvidia and other chipmakers are losing ground

Shares in Nvidia, a recognized leader among the beneficiaries of AI growth and the second-largest player in the S&P 500, fell 7.04% to $103.73 per share. The decline had a negative impact on other chip companies, leading to a 3.88% decline in the Philadelphia Semiconductor Index.

Expectations from the giants' reports

This week, investors are eagerly awaiting reports from giants such as Apple, Amazon, and Meta Platforms. Apple shares rose slightly by 0.26%, reaching $218.80, while Amazon lost 0.81%, falling to $181.71. Meta Platforms also showed a decline of 0.54%, ending the day at $463.19. Investors are concerned about the valuation of these companies against the backdrop of the current economic situation.

"A lot of people are wondering right now how to profit from investing in artificial intelligence," said Stephen Massocca, senior vice president at Wedbush Securities in San Francisco.

Investors are choosing caution: high stock prices are in question

With expectations of a Fed rate cut growing, market participants are starting to question the fair value of stocks. "Companies are showing good financial results, but the main issue is how much their shares are worth. These are expensive securities, and investors should carefully evaluate their investments," the expert comments.

Indices: Dow Jones rises, Nasdaq falls

The Dow Jones Industrial Average (.DJI) rose 203.40 points, or 0.5%, to 40,743.33. At the same time, the S&P 500 (.SPX) fell 27.10 points, or 0.5%, to 5,436.44. The Nasdaq Composite (.IXIC) lost 222.78 points, or 1.28%, to end the day at 17,147.42.

Small Caps and Financials on the Rise

The Russell 2000 Small Cap Index (.RUT) rose 0.35%, while the S&P Value 500 (.IVX) rose 0.52%, helped by the Financials (.SPSY) index, which rose 1.19%. The gains are driven by a recent shift from more expensive stocks to less expensive ones, amid expectations that the Federal Reserve will cut interest rates this year, which is linked to slowing inflation.

Energy and financials lead, technology falls

The energy sector (.SPNY) rose 1.54%, the biggest gainer of all sectors. Financials also performed well, leading the S&P's list of 11 key sectors. Against this backdrop, the technology sector (.SPLRCT) fell 2.2%, the weakest on the day.

Continued sell-off: The impact of earnings

Last week's sell-off in mega-cap stocks, triggered by disappointing Tesla results and Alphabet's outlook for high spending, continues to weigh on the market. These events have heightened investor concerns, leading to a correction in stock prices and a decline in their appeal.

Market prepares for Fed decision: Expectations of rate cuts

Investors continue to hope for easing monetary policy from the US Federal Reserve. The policy meeting is on Wednesday, and the market is pricing in a small chance of a 25 basis point rate cut. However, according to CME's FedWatch tool, that scenario is looking very real at the September meeting.

Labor data expectations

Investors are focused on labor market data this week, culminating in the government's payrolls report on Friday. The Survey of Job Openings and Turnover on Tuesday showed 8.18 million job openings in June, beating economists' expectations of 8 million.

Failures and successes: The impact of corporate news

Among the companies whose shares fell, Procter & Gamble (PG.N) stood out, falling 4.84% to $161.70 after disappointing fourth-quarter sales data. Drug giant Merck (MRK.N) lost 9.81% to $115.25 after the company revised down its full-year profit forecast.

Cybersecurity was also in the spotlight, with CrowdStrike (CRWD.O) falling 9.72% to $233.65 on news of a compensation claim from Delta Air Lines (DAL.N) over the global cyber outage. Against this backdrop, shares of cybersecurity and cloud services company F5 (FFIV.O) rose 12.99% to $200.66 on a better-than-expected fourth-quarter earnings forecast.

Market Breakdown

On the New York Stock Exchange, advancing stocks outnumbered declining stocks by a 1.54-to-1 ratio. On the Nasdaq, the picture was less optimistic, with declining stocks outnumbering declining stocks by a 1.16-to-1 ratio. This reflects the current mood in the market, where investors continue to actively re-evaluate their portfolios amid uncertainty.

S&P 500 and Nasdaq: Highs and lows amid volatile market

The S&P 500 and Nasdaq Composite indices showed interesting results on Tuesday, with the S&P 500 hitting 73 new 52-week highs and one low, while the Nasdaq recorded 133 new highs and 126 lows. Trading volume on U.S. exchanges was 11.25 billion shares, slightly above the 20-day average of 11.19 billion shares.

Microsoft disappointment and the impact on the AI market

Microsoft's (MSFT.O) quarterly results were below expectations, wiping out about $340 billion in market value for the company and its rivals vying for leadership in artificial intelligence technology. Despite this, chipmakers such as Nvidia (NVDA.O) and others showed gains after Advanced Micro Devices (AMD.O) reported results.

The contrast between the chipmakers' gains and their biggest customers' declines highlights the disconnect in AI, with some investors wondering whether Wall Street's rally in AI has become too long-winded.

Expert Comment: Wealth Transfer in AI

Gil Luria, senior software analyst at DA Davidson, said: "Microsoft reported slower growth in its core cloud business but a significant increase in capital expenditures. This could be seen as a wealth transfer from Microsoft shareholders to Nvidia shareholders."

In its earnings call, Microsoft said revenue from its Intelligent Cloud division, which includes the Azure platform, rose 19% to $28.5 billion in the quarter ended June 30. However, that was below analysts' expectations of $28.7 billion, according to LSEG.

Thus, the current changes in market dynamics highlight the volatility and uncertainty in the technology sector, especially amid changes in demand for AI and cloud computing solutions.

AI Spending: Tech Giants Under Pressure

In the last quarter, Microsoft increased capital expenditure by 78% to $19 billion, including finance leases. This spending is related to the need to expand its global network of data centers to meet the growing demand for AI technologies.

Investors are looking forward to the results of significant investments in AI

Investors are very eager to see the results of significant investments in AI. Daniel Morgan, senior portfolio manager at Synovus Trust, said: "This has become a major concern. Stocks have risen strongly in the run-up to these reports." High expectations for tech companies have led to a jump in their share prices, which is now causing concern among investors.

High Stakes and Rising Costs

Rising AI costs added to concerns after Alphabet announced a significant increase in capital expenditures to support its generative AI technology. The higher-than-expected spending has raised concerns among investors who are concerned that the cost of building AI infrastructure could be higher than expected profits.

Amid high expectations for tech giants, analysts are forecasting that S&P 500 tech companies will increase their combined profits by nearly 10%, according to LSEG I/B/E/S.

Market Correction: Nasdaq Under Pressure

However, concerns about skyrocketing AI costs that aren't being matched by similarly strong revenues have dragged the Nasdaq down 8% from its record high close on July 10. This reflects the overall market sentiment, with investors continuing to closely monitor the tech sector, balancing expectations for strong revenues with the reality of the costs of developing new technologies.

Tech Stocks: Slip and Slip Ahead of Earnings

Ahead of Microsoft's earnings, the Nasdaq has slipped more than 1%, reflecting investor caution. Other major tech stocks have also come under pressure amid the decline. However, despite the overall negative backdrop, AMD has posted a 6% gain, thanks to an upbeat third-quarter revenue outlook based on strong demand for its AI chips.

Contrary trends: chipmakers on the rise

Among other AI-related chipmakers, Broadcom (AVGO.O) posted a 1.4% gain, while Intel (INTC.O) and Qualcomm (QCOM.O) also increased their market value, gaining almost 1% each. This suggests that despite the overall decline in the tech sector, the chipmaker segment continues to attract investor interest.

AI: Reality and Challenges

Rishi Jaluria, an analyst at RBC Capital Markets, noted: "We are still in a difficult macroeconomic environment. AI is indeed a significant factor, but it requires significant investment, which is clearly reflected in the capital expenditure numbers." This highlights the current challenges that companies face in the context of global economic uncertainty and the high costs of developing advanced technologies.