AI Is So Back. Artificial intelligence, or as some call it super intelligence, is back in vogue on Wall Street. At least for now.
The AI rally raged on just ahead of some of the most highly anticipated Big Tech earnings. All the market needs is Alphabet and Microsoft to deliver nothing less than perfection. Is that too much to ask for?
The Nasdaq Composite climbed 1.2% while the S&P 500 rose 0.6%. The Dow Jones Industrial Average was roughly flat, adding only 16 points.
Chip stocks fueled the uptick on Tuesday with the PHLX Semiconductor Index rising 3.6%. Memory chipmakers also climbed higher, with the Roundhill Memory ETF rising 4.6%. Western Digital was one of the S&P 500's top gainers for the day, increasing nearly 7%.
Optic tech stocks like Coherent and Lumentum, rose as well, and the Roundhill Photonics & Optics ETF grew 3%.
Direct AI plays weren't the only ones that felt the love. Other companies exposed to the AI buildout also got a boost. In fact, the S&P 500's top performer for the day was Pentair, which was up nearly 13%. The water tech company tends to focus on water filters and swimming pool equipment, but has dipped its toes into the AI trade with water cooling systems for data centers. Wall Street is into it.
Bloom Energy followed suit, rising 7.2%. The power company has emerged as a key beneficiary of the AI-driven surge in energy demand.
Caterpillar and Goldman Sachs helped the Dow hold flat despite Boeing's nosedive. Caterpillar has emerged as a key beneficiary of the AI buildout, and Goldman was named one of the top firms behind Anthropic's IPO.
Investors are anxiously awaiting earnings results from Microsoft and Alphabet. As we saw last week with Meta's earnings, it doesn't take much for the market to sour on AI.
There's also the small matter of the world's largest central bank announcing its latest interest rate decision. The market has all but decided that the Federal Reserve will hold rates steady. The odds of a rate hike are now below 10%, according to the CME FedWatch tool.
Fed Chairman Kevin Warsh will deliver remarks, though it's unlikely he will veer from his less-is-more communication strategy.
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The Hot Stock: Pentair +12.8% The Biggest Loser: Xylem -14.2%
Best Sector: Information Technology +1.5% Worst Sector: Energy -2.2%
It's Not Just Hyperscalers
AI capex spending is top of mind for investors.
That's especially true when it comes to hyperscalers like Alphabet, Microsoft and Amazon, which are all scheduled to release earnings this week. Those companies, along with Meta and Oracle, are expected to spend a whopping $800 billion in combined capex this year.
Investor sentiment on AI is fickle, and hyperscalers face the difficult balancing act of spending enough to avoid falling behind in the AI race, without spending too much.
Any investor fears about these companies overspending is likely to send AI stocks lower this week. But that doesn't necessarily mean the AI thesis itself has changed. Instead, a downturn would demonstrate how reactive the market has become to the AI trade. And investors would do well to remember that hyperscalers aren't the only ones spending money on the AI buildout.
Around 45% of the S&P 500's cash flow from operations (CFFO) was used for capex on a trailing three-year basis, according to strategists at Wolfe Research. That figure drops only slightly to 42% when excluding hyperscalers.
That means that across the S&P 500, companies are prioritizing investing in the AI buildout rather than returning money to investors, or spending it on mergers and acquisitions.
Tomorrow, when the hyperscalers release earnings results, it's quite possible growing capex figures will spook investors. But they should focus on the fact that hyperscalers spending a significant portion of their free cash flow on capex isn't new or unique. Most of the market is doing the same.
Perhaps Microsoft and Alphabet will rise to the challenge of finding that perfect balance between spending enough, but not too much. If not, potential weakness could present a dip buying opportunity for AI bulls.
The Calendar
Wednesday will be a busy day with several of the market's largest companies releasing earnings the same day as the Federal Reserve will announce its latest interest rate decision.
Align Technology, Alphabet, American Electric Power, American Water Works, Amphenol, Automatic Data Processing, Biogen, Boston Scientific, Carvana, Chipotle Mexican Grill, C.H. Robinson Worldwide, eBay, Equinix, FedEx, Ford Motor, Fortinet, Fortive, Flex, GE HealthCare Technologies, GE Vernova, Gen Digital, Generac Holdings, GSK, Honeywell Aerospace, IDEX, Invitation Homes, International Paper, KLA, Labcorp Holdings, Lennox International, Mid-America Apartment Communities, Masco, MGM Resorts International, Microsoft, NiSource, Old Dominion Freight Line, O'Reilly Automotive, Otis Worldwide, Phillips 66, Raymond James Financial, ServiceNow, TE Connectivity, T-Mobile US, Tyler Technologies, UBS Group, Vici Properties, and Vertiv Holdings release earnings tomorrow.
The Federal Open Market Committee announces its monetary-policy decision. The central bank is expected to keep the federal-funds rate unchanged at 3.75% to 4%.
-- Dan Lam
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