Hope you are all doing well. Happy Veterans Day! Thank you to all who have served. A one-sided midterm election outcome, fresh concerns about AI, and a better-than-expected jobs report were the fuel for a volatile week in the U.S. market. Stocks rallied Wednesday, tumbled Thursday, and mounted a partial recovery Friday. The NASDAQ finished 3.4% lower for the week, the S&P 500 fell 2.7%, and the Dow slipped 0.9%. If you money on sidelines now is a good time to deploy it. Veterans Day is Wednesday, so I have broken down this week’s update using songs and lyrics from my all-time favorite musician, Johnny Cash. Cash served in the U.S. Air Force as an intercept radio operator in Germany.
God’s Gonna Cut You Down
The mega-cap tech stocks have run on for a long time; investors are starting to cut them down or at least their expectations. For the first time since late 2022, quarterly earnings expectations for the Magnificent Seven are lower than forecasts for the rest of the 493 stocks in the S&P 500. In the wake of mixed third-quarter reports from selected Mag Seven stocks, the group as a whole was expected to report a 22.6% growth rate overall for the quarter versus 32.6% for the other 493 companies. Thursday’s 5.5% drop for the NASDAQ marked its biggest daily decline in 19 months. It sent the index into a correction. It has fallen more than 10% below the record level that it set on October 6. On Thursday alone, the total market capitalization of the Magnificent Seven dropped by more than $1 trillion. This knee-jerk reaction to the election results is wrong, and here’s why. The group anchors the ongoing AI boom. Nvidia provides foundational hardware and software infrastructure, while cloud giants like Amazon (AWS), Microsoft (Azure), and Alphabet (Google Cloud) supply the computing architecture for enterprise AI adoption. AI is not going away despite all rhetoric around data centers. Several tech companies have seen their price-to-earnings multiple compress under scrutiny over heavy AI capital expenditures The reality those companies continue to increase their market dominance through these expenditures. Even if laws are passed in Congress, they will likely be vetoed. Gridlock will cause the current regulatory environment to stay static. Certain members—particularly Nvidia, Amazon, and Alphabet—continue to project strong double-digit or triple-digit profit and revenue expansion tied directly to commercializing AI workloads and digital services. Companies like Meta, Apple, and Alphabet possess massive global user bases, deep customer loyalty, and robust balance sheets that allow them to weather any storm, even a Blue Tsunami.
A Boy Named Sue
Despite all the negativity that’s out there related to stocks, when you look at the data, you come away with a different point of view. The U.S. labor market is strong. It rebounded in October, blowing past economists’ consensus forecast with a gain of 165,000 jobs, far above the 12-month average of 48,000 added per month. In addition, initial figures for August and September were revised upward by a total of 84,000 jobs, and unemployment slipped to 4.1% from 4.2% the previous month. Oil prices are coming back down. The price of U.S. crude fell on Wednesday to around $88 per barrel, the lowest in more than two months, before creeping back up to around $90.50 on Friday afternoon. Overall, U.S. crude ended the week down about 12% as investors assessed the outcome of the midterm election and its potential impact on the Middle East conflict.
Five Feet High and Rising
It was a wild week of swings as investors headed for higher ground. The CBOE Volatility Index (VIX), the gauge tracking investors’ expectations for short-term U.S. stock market volatility, fell to as low as 16.6 following Tuesday’s midterm election. However, that was short-lived as the VIX surged to 28.4 on Thursday, the highest in more than seven months. By Friday’s close, it had pulled back to 25.6 but was nevertheless up 32% for the week. Historically, the best time to invest is when people are most afraid.
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