Market Update: Recovery Takes Hold, But Investors Remain on Edge

Key Takeaways

• Amazon fails to join in the recovery rally.
• Tech earnings hide the truth about AI spending.
• Apple solidifies its position at the top of the Magnificent 7 after a strong week.
• Gold outperforms silver.

Market Overview

Following a significant downturn on Thursday, markets are poised for another recovery. The recent mini-recovery in Bitcoin, which has risen by $5,000 but remains below the $70,000 mark, is expected to boost overall market sentiment. Silver and gold are also showing signs of recovery, with the S&P 500 index up by more than 1%, primarily driven by the tech sector.

Amazon's Earnings Impact

Despite the overall market recovery, Amazon's stock has dropped by 9% following its earnings report and a substantial capital expenditure pledge. This indicates that while some sectors are recovering, there are still significant weaknesses in others, particularly in the tech sector.

AI Investments and Tech Earnings

While tech earnings have been strong, with an average sales growth of 16% and earnings growth of 24% among 35 technology companies in the S&P 500, much of this growth is not attributed to AI investments. Major players like Meta and Google continue to rely heavily on their advertising businesses for profits rather than their AI initiatives.

Return on Invested Capital (ROIC) for the largest AI spenders in the Magnificent 7 has declined this year, raising concerns about the sustainability of their investments in AI. Investors are increasingly looking for solid fundamentals rather than speculative growth.

Shifts in the Magnificent 7

Apple has emerged as a leader in the Magnificent 7, gaining nearly 10% this week, alongside Nvidia, which is expected to benefit from increased capital expenditure from hyperscalers. This shift in leadership reflects changing investor sentiment towards companies with more stable fundamentals.

Precious Metals Performance

The recent selloff in silver indicates market nervousness regarding potential bubbles, while gold has outperformed silver, suggesting it is viewed as a safer investment. The gold/silver ratio is increasing at its fastest rate since March of the previous year, with silver prices down 10% this week, while gold has regained all its losses and is up more than 1%.

Geopolitical and Market Outlook

As geopolitical risks diminish, particularly with positive developments in US-Iran talks, oil prices are stabilizing. The overall selling pressure on riskier assets like tech stocks and Bitcoin is easing as the week concludes. However, upcoming risks, including the delayed release of the January payrolls report, could impact market sentiment in the following week.