What's Behind the Volatility in U.S. Stock Markets?
Amazon's recent performance has raised eyebrows as one of the seven major tech companies in the US stock market. On Friday, its shares tumbled by 4.19%, a reflection of mounting investor concerns about both lackluster financial results and grim forecasts for future growth. The company’s second-quarter earnings report failed to meet expectations, leading analysts to caution against a potentially stagnant outlook for the near term.
During the last earnings season, Amazon unveiled disappointing results, indicating that the pandemic-driven surge that favorably impacted its business might be coming to an end. The company’s stock saw a dramatic downturn, plummeting by 7.5% on the day following its disappointing report. The executives expressed concerns that the next several quarters may not yield the growth previously enjoyed, especially as consumers transition back to in-person shopping following pandemic restrictions. Over the past few months, as physical retail outlets have reopened, shoppers are venturing back into stores, diverting their expenditure away from online purchases to travel and other services, thus creating a sense of unease about Amazon's future business prospects.
Financially, Amazon's results were below Wall Street's expectations, with reported operational earnings missing by 2% and 1% respectively. The guidance for the next quarter also fell short, suggesting a continued slowdown in the e-commerce giant’s growth trajectory. While many investors recognize that growth deceleration will place pressure on Amazon’s stock in the short term, several analysts maintain their confidence that the e-commerce sector will continue to expand in the long run, ultimately benefiting Amazon. Nevertheless, such earnings reports hint at a period of volatility for Amazon, with the possibility of sideways trading until new catalysts emerge.
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On the operational front, Amazon is not without its challenges. The company’s cloud division, AWS, despite being the largest in the sector, faces increasing competition, particularly from Microsoft’s Azure. The loss of a significant $10 billion cloud computing contract from the Pentagon to Microsoft last year stirred speculation that a new wave of competition in the cloud computing landscape could be unfurling. As AWS has been a cornerstone of Amazon’s profitability, any significant momentum gained by Azure or competing platforms poses potential risk for Amazon shareholders.
Moreover, Amazon’s physical retail business has also been impacted. The increase in vaccination rates is leading more people to return to pre-pandemic socializing and shopping habits. Amazon's management acknowledges that the resurgence of in-store shopping dampens growth prospects for its e-commerce operations.
In summary, the 4.19% drop in Amazon’s stock can be attributed primarily to its dismal earnings report and mounting concerns regarding future growth, alongside various operational hurdles it faces in implementing its business model.
Similarly, Meta Platforms saw its stock decrease by 4% on Friday. There appear to be multiple factors at play, including heightened scrutiny on social media giants like Facebook, raising alarms among investors regarding potential regulatory actions from Washington.
At the same time, speculation emerged suggesting that if TikTok were to be suppressed, Facebook could potentially double its revenues, casting doubt on Meta’s future outlook in a highly competitive digital marketing landscape. Compounding the pressure, New Zealand’s government has signaled plans to legislate that large tech companies, including Meta, compensate local media outlets for access to local news content. This legislative move mirrors similar laws in Australia and Canada, aimed at ensuring that digital platforms collaborate fairly with local journalism. As advertising increasingly shifts to digital spaces, New Zealand's media, particularly smaller regional and community newspapers, face financial viability challenges, leading to growing tensions between tech behemoths and traditional news outlets.
Conversely, Tesla's stock gained over 3% on Friday, buoyed by several favorable developments.
Primarily, the company's third-quarter earnings report indicated robust sales growth. Reports highlighted a revenue increase of 8% year-over-year for Tesla's third quarter, cumulatively reaching $25.18 billion, while gross profit surged by 19.6%, signaling strong operational health. Notably, sales in China made significant contributions, where Tesla produced and sold 249,135 electric vehicles in the third quarter—an impressive 21.09% increase month-over-month.
Additionally, the global demand for electric vehicles remains high, with Tesla's continuous rise in vehicle sales attributed to its persistent technological innovations and exceptional user experiences. The Model Y, for instance, emerged as the best-selling car in countries like Sweden, the Netherlands, Denmark, and Switzerland during 2024, while also topping sales charts in China and Europe in September. In fact, it was the best-selling electric vehicle in Norway's history.
In a related vein, Tesla’s affiliated fund, Destiny Tech100, which is tied to SpaceX, also experienced a remarkable 12.24% increase, reflecting investor enthusiasm for this sector. This particular fund has gained considerable traction, witnessing an astonishing 800% spike in just two weeks, attributed to its focus on high-growth private tech firms such as SpaceX and its promising initiatives.
Adding to the positive sentiment around Tesla, renowned investors have publicly supported Elon Musk, projecting that Tesla's stock could surge by approximately 550% by 2030, with SpaceX’s valuation potentially doubling in the same timeframe. Such forecasts are likely bolstering investor confidence in Tesla's trajectory.
To encapsulate, Tesla's over 3% increase is a composite result of strong third-quarter financial performance, enduring global demand for electric vehicles, and the successes of its corresponding financial instruments.
As for the Destiny Tech100 fund, its surge of 12.24% can be attributed to various influential factors.
Foremost, investors are optimistic about SpaceX's future, buoyed by promising developments set to unfold in 2024. For instance, CEO Elon Musk emphasized during an annual presentation that SpaceX houses the most exceptional team in the space industry, boasting record launch frequencies with the Falcon rockets last year. The reuse capabilities demonstrated by a Falcon 9 booster completing 19 launches over three and a half years showcased a promising route for sustainable practices in future space initiatives.
Equally noteworthy is SpaceX's growing profitability from its Starlink project. With 190 commercial satellite launches executed globally this year, SpaceX’s Falcon 9 has accomplished a staggering 86% of America’s commercial satellite missions. There are now approximately 6,000 Starlink satellites in orbit, offering services to over three million customers across more than a hundred countries and regions. The service reached profitability for the first time this year, with predictions estimating $6.6 billion in revenue for 2024—a signal of positive growth that fosters investor confidence.
Additionally, the noteworthy advancements in the Starship's testing and successful flights have captured considerable attention from investors. The Starship, being the largest and most powerful rocket ever built, aims to transport humans and cargo to Earth’s orbit, the Moon, and even Mars. Its successful testing endeavors are enhancing the excitement surrounding its capabilities for the future.
Moreover, SpaceX's ongoing fundraising efforts illustrate the company’s dedication to future growth initiatives. Plans to raise $500 million at a valuation of $30.5 billion for its satellite internet service bolster investor enthusiasm, alongside a previous fundraising round which amassed $2 billion, pushing its valuation beyond $46 billion. Such capital infusion plans underscore SpaceX's financial backing for upcoming projects and capture investor interest in its related fund, Destiny Tech100.
In an integrated overview, strong investor confidence in SpaceX’s future, enhanced profitability in Starlink, the successful testing of the Starship, and optimistic fundraising strategies collectively propelled Destiny Tech100’s 12.24% growth.
Beyond these mentioned entities, other members of the so-called “Big Seven” tech firms, like NVIDIA, Microsoft, Google, and Apple, have seen varied downturns, shedding light on the vulnerability of tech stocks in today’s market climate and a pervasive sense of unease surrounding the economy’s trajectory.
In the case of NVIDIA, it has been unable to escape the recent downturn alongside its tech peers. As enthusiasm wanes for the tech sector overall, investors are recalibrating their expectations for the semiconductor industry, to which NVIDIA is intrinsically linked. The current economic environment, entwined with rising inflation concerns, poses potential limitations on demand for premium chips, likely affecting NVIDIA's performance. On the competitive front, the semiconductor space is fraught with emerging challengers, intensifying pressures on NVIDIA.
Microsoft's stock fluctuations also reveal vulnerabilities amid the current market conditions. The software and cloud computing sectors are facing numerous challenges, and economic uncertainties are driving enterprises to reevaluate software investments and cautious cloud spending. Additionally, Microsoft finds itself contesting an intensifying landscape in artificial intelligence, with many tech rivals escalating their investments in AI solutions.
Concerning Google, its recent struggles primarily stem from fluctuations in the advertising market. Economic slowdowns have dampened advertising expenditures, thereby impacting Google's advertising revenue negatively. The competition surrounding Google's advertising operations has intensified, particularly in the search and digital marketing domains where rivals are claiming a larger share of the pie.
Apple's modest declines correlate with evolving consumer demand and rampant market competition. A saturation of the smartphone market has led to dwindling demands for new models, further compounded by competitive pressure from other smartphone manufacturers. Moreover, Apple’s latest product launches have not resonated as anticipated, contributing to their stock's downward movement.
In today’s economic landscape, where high inflation collides with uncertain growth, a greater awareness of risk management is shaping investment strategies, prompting a shift towards traditional defensive sectors. Investors are now more judiciously evaluating their portfolios and considering equities with robust fundamentals and cash flows while increasing allocations in sectors like healthcare and energy for diversification and stability. For example, BlackRock has pointed out that 2023 may favor energy and healthcare stocks, advocating that these sectors could represent sound additions for portfolio diversification. Healthcare equities are seen as particularly promising due to demographic shifts and an escalating focus on health and wellness amidst aging populations. Furthermore, during times of conflict, healthcare stocks may attract investment interest as demand for medical supplies can spike in times of crisis.
Additionally, investors are encouraged to explore various asset allocation strategies according to their risk appetites, investment goals, and horizons. By diversifying across asset classes, they can mitigate risks. When constructing portfolios, factors like asset allocation, risk assessment, and return evaluation should be closely monitored. To evaluate investment portfolios accurately, metrics such as volatility-adjusted measures, beta-adjusted parameters, and own-risk-adjusted indicators should be implemented for informed investment decisions.