Capital Idea: Market wrap, 2 November

• Wall Street’s tech wreck continues on fears of waning AI boom

• Risk aversion compounded by geopolitical and US political risk

Wall Street’s tech-wreck continued on Friday as earnings season fails to live up to high expectations. The NASDAQ fell into technical correction territory after Amazon and Intel’s results cast further doubt over the so-called AI trade. The numbers that S&P 500 companies are putting up for the quarter in aggregate are objectively strong. Earnings growth is still tracking towards nearly 30% for Q3 with analyst estimates projecting a similar result for the quarter ahead. However, earnings beats are lower in number, the extent to which companies are exceeding expectations, especially on the top line, is lower, and the forecast for Q4 earnings growth has been revised down marginally. Most important of all, Magnificent Seven companies’ results are lukewarm at best. The big theme emerging in the market is now that weaker than expected AI monetisation and slowing capex growth hints at a tech sector that has overextended itself and is positioning for lower expected future returns. The one saving grace is valuations are now at levels historically considered attractive, with the S&P 500’s forward price-to-earnings below its five- and ten-year averages.

(Source: FactSet)

Wall Street’s drop is not happening in isolation, with valuations also reflecting expectations of higher interest rates and heightened uncertainty in the markets. Last week’s slew of central bank meetings reminded market participants that interest rates are all but certain to be heading higher as global inflationary pressures continue to build. Meanwhile, in association with that, the rising prospect of a fresh escalation in the war between the US and Iran is keeping oil prices within touching distance of multi-year highs as speculation mounts that the US is preparing fresh strikes on Iran after US midterms. The midterms historically lift market volatility and depress market sentiment too with market participants treading carefully going into an election this week that, based on polling, betting markets and prediction markets, is likely to deliver a so-called blue wave.

No slow start will be afforded to global markets to kick off the new week as futures point to a bearish open for the Asian region. Apple’s results, though not really any sort of a measure of the AI boom given the company has opted to sit out the proverbial arms race, will still carry weight. The reaction to them hinges on demand for Apple’s latest suite of products and the growth it can capture in a moribund and competitive Chinese market. Meanwhile, further headline risk about the war and positioning for the midterms will also drive price action.