Wall Street faces a twin set of risks on Wednesday, tied to Big Tech earnings and a Federal Reserve interest-rate decision, as stocks undergo a rare change of leadership ahead of the summer market doldrums.
An index of S&P 500 stocks, each with an equal weighting of 0.2%, hit a fresh record high of just under 8816 points on Tuesday, extending its year-to-date advance to more than 13.5%.
That's a full five percentage points better than the benchmark S&P 500, which is heavily weighted with tech and AI stocks, since the start of the year and nearly 6.5% better since the start of the second quarter.
The moves reflect the broader rotation away from tech, which started at the beginning of the year, but was disrupted by the launch of the U.S. war with Iran and the spike in global crude prices it created.
That changed the game in terms of Federal Reserve rate hike bets, which are now trading as high as 30% heading into Wednesday's policy decision in Washington.
Non-tech sectors have been hot for the past three months, however, with healthcare leading gains with a 13.9% advance and financials following up with a 9.8% gain.
Tech stocks are third, rising 8.5%, but those gains have faded over the past months as an index of the Magnificent Seven tech giants slipped into correction territory and the PHLX semiconductor index of chips stocks slumped nearly 25% from its late June peak.
Investors are now left to wonder how, or if, the market's broader rotation can survive a hawkish Fed, which investors see raising rates by a quarter of a percentage point in September.
But also how, or if, the current tech market narrative can separate from concerns about spending on artificial intelligence to bets on how that money will translate into bottom line profits.
Fed Chairman Kevin Warsh will take reporters' questions on Wednesday afternoon in Washington, while Big Tech titans Microsoft and Meta Platforms will publish June quarter earnings after the closing bell.
"The market's response to both should provide a clearer indication of whether the current rotation continues or begins to develop into broader weakness," said Zaheer Anwari, co-founder and CEO of the Luxembourg-based Revacy Fund.
That theme, which captures investors between bullish and bearish views, was also evident in last night's record high close for Apple, which has gained more than 25% since the start of the year and re-established itself as the world's most valuable tech stock with a $5 trillion market value.
Options markets for Apple, which reports June quarter earnings on Thursday, suggest a 4% share price move. The group isn't spending much on AI, and is transitioning well into the retirement of CEO Tim Cook later this summer.
The same options for Meta Platforms, however, suggest an implied move of around 8%. The company is slated to spend as much as $145 billion on AI projects this year, with off-balance sheet items alongside, and has fallen nearly 20% over the past six months.
That could speak to what Luke Lango, technology analyst and publisher of the Innovation Investor, sees as a big division in investor sentiment.
He notes that Morgan Stanley has boosted its AI capex target to around $1.4 trillion by 2028, with big changes in spending unveiled by Google, Tesla, TSMC, OpenAI and Nvidia over the past few weeks.
"The aggregate picture is one of the widest divergences between AI infrastructure fundamental momentum and AI infrastructure stock price performance in the history of this bull market," he said. "When that divergence has appeared before, it resolved with stock prices moving toward fundamentals. We have no reason to believe this time is structurally different."
The next few days will likely determine that, and either restart the AI trade, while trimming the recent outperformance of non-tech stocks, or send markets lower into the traditional August lull.
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