‘Great rotation’ faces big test with Big Tech earnings
When I was a cub reporter in Los Angeles, covering crime for the now-deceased Los Angeles Herald Examiner, we used to joke that we should never let the facts get in the way of a good story. It was a horrendous paper — don’t ask me what I was doing there other than booking a paycheck. My late editor, Don Forst, used to tell me that if I wanted truth, I should be novelist. But I was in newspapers, which meant I did whatever was necessary to sell papers, fighting every minute to try to find a way to tell the truth in the face of a phalanx of editors who knew how to sensationalize no matter what the story. The facts would periodically drift into my copy, and I would be most grateful for the reprieve. The stock market can be like that paper. We say all sorts of things and create all sorts of theses to explain what’s driving the action, but eventually the rubber meets the road. That will be the case in this jam-packed week , with the earnings from Microsoft on Tuesday, Meta Platforms on Wednesday, and Apple and Amazon on Thursday. There’s been a whole lot of extrapolation about how these Club holdings are really doing without a lot of facts — not that the facts mattered with either Alphabet or Tesla , both of which failed to disappoint last week, and yet their earnings were greeted with disappointment anyway. I do not mean that cynically. If the so-called “great rotation” out of megacap technology stocks into small caps that began earlier in July hadn’t been at its zenith, I think both stocks would have rallied. The crucial line for Club name Alphabet was the Google Cloud number, which was much better than expected . The issue with YouTube, whatever the heck it was said to be, made no sense whatsoever. They can’t handle how much business they have. And all the spending on the data center to support generative artificial intelligence initiatives? The company is in a jam on this one. If Alphabet said it cut back on data-center spending, then it would be alleged the company is falling behind Amazon and Microsoft in the AI race. Instead, Alphabet said it would keep spending a great deal, so it was blasted as a company with no discipline and certainly no return on investment. The company also is now dogged by another competitor in search engines after ChatGPT creator OpenAI announced a prototype of SearchGPT . Well, that had to happen, didn’t it? I will take my chances that the Google franchise maintains its longtime dominance. The reaction to Tesla was just plain weird. Tesla’s stock began to soar at the end of June on absolutely nothing. We all knew the electric vehicle maker was going to miss estimates. I mean, what’s the big deal? I don’t know a soul who thought this quarter would be even remotely in line. But when it wasn’t, somehow that was revelatory. I actually liked the call because CEO Elon Musk laid out the longer-term vision, which was great because I didn’t care what that longer-term vision was going to be if he didn’t stay as chief executive. Now that I know the multiyear plan — autonomous vehicles, solar energy and robots — I am inclined to push the stock hard as it falls. We saw so much bilge extrapolated to the tech titans reporting this week that it will be delightful, at last, to have the facts get in the way of the story. I expect the much-hyped rotation to stay hyped even as we know the truth: Nobody is actually buying the small caps because so many of these companies are pathetic. They are just buying baskets of these stocks, specifically funds tracking the Russell 2000 and S & P 600 . There isn’t enough liquidity in these small-cap gauges, so anyone who sells a large amount of megacap tech and goes into these indices makes them look super good. That’s going to hang over this week’s earnings like a nasty shroud. Then there’s the data center sword of Damocles that skewered Alphabet. It can do the same to all of these companies set to report because they also have been writing checks like mad to Club holding Nvidia to secure AI computing resources. I think Microsoft on Tuesday evening might be vulnerable from the cloud side because of Google Cloud’s robust growth. Microsoft has to come out and tell a ServiceNow -like story about Copilot, its AI-powered digital assistant product. This also will be the first quarter where we have the new AI-infused personal computers. Will Microsoft have say something good about the initial customer response? It’s not clear given the way that shares of fellow portfolio name Best Buy have stalled, and Best Buy is the company doing the plurality of the selling of these AI PCs . Still, Microsoft is the stock with the fewest enemies. It stands to reason that it will acquit itself well. The following evening Meta gives us its results. Maybe we can get some clues from CEO Mark Zuckerberg on Monday during his fireside chat with Nvidia’s Jensen Huang at Siggraph, a big graphics conference in Denver. It’s a favorite venue of Huang’s, and Monday will be truly a remarkable get-together given how not long ago these two CEOs were not that close. Of course, Zuckerberg is shrewd enough to not get in the way of Meta’s earnings quiet period, but I think he might explain why he’s spending so much on Nvidia hardware, which could take the sting away from an Alphabet-like inquiry on the company’s earnings call a few days later. Zuckerberg is a forward-thinking person, so he may actually be able to articulate why he is spending all the money on the data center. Facts, not stories. The digital-ad business is a good one for Zuckerberg. Still, like everyone else in the industry, Meta might be grappling with some drop off in spending from Asian e-commerce giants Temu and Shein, which had been aggressively courting customers abroad . However, this risk has now been pretty well-telegraphed, and I am just hoping for no faux surprises. It’s very hard to move the needle for this company given its scale. For example, Zuckerberg has a red-hot property in the Ray-Ban Meta smart glasses, which would be big for just about any company except a tech titan expected to generate almost $160 billion in revenue this year. I wonder if the smart glasses — and the investment Meta might be making in Ray-Ban owner EssilorLuxottica — will even get mentioned on the call. On Friday, shares of EssilorLuxottica had a huge move, which might have stolen some of the upside. Apple reports on Thursday, and if you think the cloud-computing heavyweights are spending on too much AI, then you should be buying Apple. It’s basically an AI play without the heavy capital expenditure spending risk. If you buy Apple here, you also are following the traditional thinking that this is the last earnings report before a new iPhone version launches in September, so you want to get in right after the quarter. It’s a good story. Amazon is problematic like Alphabet. It’s spending a fortune on AI while losing a fortune on its digital assistant Alexa. Sure, there was just a big Prime Day event that featured steep discounts on a lot of items. However, Wall Street doesn’t care about that. It wants to hear a clearly articulated story about why Amazon is so enamored with AI. I think CEO Andy Jassy and Co. will have something good to say, or at least a decent story. But it feels tired, in need of something new. I just don’t think a strong Amazon Web Services number will do the trick. All of these stocks are fighting another enemy now, besides data-center spending fears and the small-cap run: the Federal Reserve. As it dawns on people that the Fed will cuts soon, any sign that there may be a housing recovery — even if there isn’t one materializing yet — will be met with buying in stocks that benefit from that development. Just consider three of the biggest gainers in Friday’s session: Mohawk Industries , the carpet company; Fortune Brands Innovations , the high-end home accessory business; and DeWalt parent Stanley Black & Decker , which we own for the Club. The first two reported OK earnings, and their stocks still took off because the companies showed discipline, which will turn into operating leverage when the rate-cutting cycle begins. As for Stanley Black & Decker, we sold some into Friday’s strength because we don’t want to get skunked by a bad quarter Tuesday morning. Basically, we wanted a smaller position until we have a better sense of how the toolmaker intends to capitalize off the moment. Over the past few quarters, I thought management would tell a good story as we waited for the housing market to turn, but it hasn’t so far. I don’t know why, but we have to keep these guys on a short leash: We don’t want to discover facts that get in the way of the Fed rate cut cycle. The strength in anything home makes us unsure about how in heck all of the government debt can be so easily absorbed. Right now, it’s been spectacular for bonds as yields trend lower, which keeps the housing-related story on track. You need both low bond yields and lots of rate-cut chatter to make this part of the market get momentum. It’s got something to build on. The megacap techs, on the other hand, do not have something to build on after this recent rotation. They have not been able to lose their whipping-boy status. Maybe this week could be the week that it happens. Random musings I want to briefly address a few more topics before the busy week of earnings officially arrives. Contrary to the numerous press reports about my supposed “endorsing” of Vice President Kamala Harris, I want to repeat where I stand about the frontrunner for the Democratic nomination through the lens of investing in the stock market: The former California senator — whose brother-in-law, Tony West, is the chief legal officer of Uber Technologies — has real contacts among the tech titans. President Joe Biden always chose to have his agencies wear down tech companies. He appointed to key roles at the Department of Justice and Federal Trade Commission antitrust attack dogs who have it in for tech. Unless Harris specifically says her hypothetical administration would change nothing about its approach, I believe it’s hard to be more disdainful of tech than Biden, who truly did not care about these companies other than to try to break them up or prosecute them. I believe Harris will be more practical, if only because she knows so many of them and can talk to them face to face. Biden couldn’t. Biden’s main conduit to the business world has been Gina Raimondo, the brilliant head of the Department of Commerce. Notably, Raimondo said she expected Harris to be on board with the semiconductor manufacturing build out in the U.S. because she had expressed so. But the most important part of the Wall Street debate when it comes to Harris versus Republican nominee Donald Trump is the shocking antagonism Trump’s running mate, Sen. JD Vance of Ohio, has against Big Tech. Vance uses old-fashioned populist rhetoric against corporations, and he is no friend of the tech titans. The idea that the Republican Party is uniformly pro-business has become more complicated. The tariff proposals that Trump has floated could really hurt business. And Trump’s recent comments about Taiwan paying the U.S. for defense that raised questions about his support for the self-governed island and chipmaking hub? That was music to Chinese President Xi Jinping’s ears. It would also make me change my stance toward owning and not trading Nvidia because the company would not be able to get the chips it needs if the Chinese make a move on Taiwan. What a reckless statement. That’s why I said if you own a lot of international companies and tech stocks and want to vote to help your portfolio, Harris is more likely to help those firms than hurt them. I want to point out that what I didn’t say was that if you wanted to vote your paycheck, you should vote Trump, especially if you are wealthy, because he wants to cut your taxes. His help for you when it comes to taxes is as profound as I expect Harris to be when it comes to tech. And now I need to mention this nearly $500 million verdict against Club holding Abbott Laboratories over allegations that it failed to disclose the risks of its specialized infant formula. I know I repeatedly warned about this case, but I am stunned about the size of the damages handed down Friday. Abbott said it would try to have the verdict overturned. But the case was handled in St. Louis, Missouri, the worst venue for defendant drug companies. I am very concerned by this decision not just as an Abbott shareholder, but as an American. The Food and Drug Administration needs to step up here because this was an outrage, and Abbott must pull its formulas for premature infants now because it only makes $9 million a year on them. What a travesty our country has become when it comes to suing companies. But I don’t expect Biden’s agencies to get behind Abbott. They are pretty much in league with the plaintiff’s bar on everything. (Jim Cramer’s Charitable Trust is long GOOGL, NVDA, AAPL, AMZN, META, MSFT, SWK and ABT. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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When I was a cub reporter in Los Angeles, covering crime for the now-deceased Los Angeles Herald Examiner, we used to joke that we should never let the facts get in the way of a good story. It was a horrendous paper — don’t ask me what I was doing there other than booking a paycheck. My late editor, Don Forst, used to tell me that if I wanted truth, I should be novelist. But I was in newspapers, which meant I did whatever was necessary to sell papers, fighting every minute to try to find a way to tell the truth in the face of a phalanx of editors who knew how to sensationalize no matter what the story.
