To The Moon

After a major correction in April, the US stock market managed to regain most of its lost ground in early May. But don't be fooled by appearances! The recent earnings reports are painting a not-so-rosy picture for the future.

Sure, the big tech giants are still chugging along, keeping the indices afloat, but three of the Magnificent Seven - $Apple(AAPL)$ $Tesla Motors(TSLA)$ $Meta Platforms, Inc.(META)$ - are already under Wall Street's scrutiny, narrowing the market even more.

And now, a growing number of smaller tech stocks are dropping bombshells with their earnings reports, sending their shares tumbling. Even some former stars are among them.

Plus, companies like $Airbnb, Inc.(ABNB)$ $Starbucks(SBUX)$ $Uber(UBER)$ $Nike(NKE)$ are showing signs of trouble. Their lackluster earnings are a clear indication that the purchasing power of the American middle class is taking a serious hit, and the consumer-driven market is starting to lose steam.

It's making me wonder: Will this AI rally, powered by big companies' capital expenditures, end up being a bubble without solid fundamentals?

Mid-Small Tech Sector Widely "Misses Expectations"

The list of companies whose shares fell sharply after releasing their earnings is long, and includes many "internet celebrities" of the past few years, like $Uber(UBER)$ $Airbnb, Inc.(ABNB)$ $DoorDash, Inc.(DASH)$ $Roblox Corporation(RBLX)$ $Shopify(SHOP)$ $ARM Holdings Ltd(ARM)$ $Palantir Technologies Inc.(PLTR)$.

Among these fallen stars, Arm and Palantir are the ones that really caught my attention. After all, they both rode the AI wave and saw some serious gains. But if these two keep sliding, it'll be a red flag for the entire AI sector.

Fortunately, it's not going to rock the entire industry, and $NVIDIA Corp(NVDA)$ , the leader in AI chips, should be fine for now.

In fact, many small and medium-sized tech companies have seen some decent gains over the past year. But the bubble during the pandemic was just too big, overshadowing the impressive growth of the big tech stocks.

This correction in small and medium-sized tech companies is more in sync with the macroeconomic trends, reflecting the struggles of businesses in a high-interest rate environment.

Magnificent Seven shrunk to "Magnificent Four"

Apple and Tesla fell out of the pack early on, and even though they made a small comeback, they're no longer part of the elite group.

And after Meta's latest earnings report, which was dragged down by hefty capital expenditures, many analysts are questioning its status as a tech giant.

So, how long can the "Magnificent Four" keep up with the AI hype? Take NVIDIA, the leader of the pack, for example. Its position as the top dog in AI chips is still solid, and Arm's slump isn't a threat to it.

Based on the earnings reports from these big companies, they're still pumping money into capital expenditures, meaning NVIDIA's earnings should remain robust.

But here's the catch: Market expectations are sky-high, so it'll be tough to surprise investors with stellar results. The real question is whether these capital expenditures will translate into widespread technology adoption and revenue growth. At this point, it seems more likely that a few winners will take all, rather than the entire concept collapsing.

In any case, NVIDIA's earnings report on May 22nd is a big one. Just being "fine" isn't enough, rapid growth is already expected. Only being "great" can drive significant stock price growth. Otherwise, the market will continue to slow down.