Quarterly reports from Alphabet and Tesla did little to boost confidence, pushing their shares lower and dragging the broader market down with them. Stubborn bears see this as a sign of a coming correction.
The reasoning is that if the market loses one of its key growth pillars, a sell-off in the S&P 500 is inevitable. However, even if this is a sound rationale, it is crucial to understand what has disappointed investors so much.
In the case of Elon Musk's company, it was not so much the missed profit estimates for the fourth consecutive quarter, with auto sales revenue down 7%, but the uncertain outlook.
The main issues were the lack of clarity about the Robotaxi, the use of robots, unclear details about the new fully autonomous driving functions, and the availability of the new roadster.
Had there been more clarity on these points, the fall in Tesla stock, despite earning $1.48 billion in the second quarter, down from $2.7 billion a year ago, might have been less severe.
Concerns about a possible Trump presidential victory and a possible rollback of the Inflation Reduction Act, which includes tax credits for EVs, also dented optimism about Tesla.
There are two scenarios for the company's shares to improve: either Tesla manages to boost margins or the cult of Elon Musk gets a further boost.
As for Google's parent Alphabet, it posted strong revenue growth in its search advertising and cloud computing businesses, which boosted profits.
The problem is that spending has spiked: $13 billion in Capex for the Q2 of 2024, and its chief financial officer, Ruth Porat, expects similar expenditures for the rest of the year.
What can we expect from the market?
It is impossible to predict with 100% certainty where the market will go (if it were that easy, everyone would be a millionaire). However, one thing is clear: volatility could increase.
On the one hand, if the other stocks in the Magnificent Seven also fail to excite investors, enthusiasm for AI and tech stocks could wane. The hope is that, rather than cashing out, there will be a rotation in investment.
On the other hand, there is also the risk of political uncertainty in the US. With Biden out of the presidential race, Trump could face stiffer competition and, therefore, a lower chance of winning.