“AI” Caramba — The Bubble About to Burst? 🫧

Good Afternoon! Today is July 17, aka World Emoji Day! Ever wonder why?Take a peek at the Calendar emoji: it’s always July 17. Apple chose this date because they unveiled iCal for Mac on July 17, 2002, at the MacWorld Expo. Emojipedia, the masterminds behind World Emoji Day since 2014, figured it was the perfect date for emoji celebrations.

Most platforms hopped on the July 17 bandwagon for their Calendar emoji, but a few rebels remain. For instance, Facebook’s Calendar emoji stubbornly displays May 14—Mark Zuckerberg’s birthday.

MARKETS

• The Dow's back in action, surging another 240 points as the cyclical rotation rolls on, marking its 22nd record close this year. On the flip side, the S&P 500 had its worst day since late April, and the Nasdaq took a nosedive to its lowest finish since December 2022.

• Here's a fun tidbit: The last time the Dow rose while the S&P 500 dropped more than 1% was way back in 1999.

• Gold hit a record high yesterday on hopes of a rate cut. Today, the hot commodity cooled off as investors cashed in.

• Oil prices climbed, thanks to an Energy Information Administration report showing higher demand and lower crude inventories.

• Bond yields held steady during the session but dipped slightly after an underwhelming 20-year Treasury bond auction.

STOCKS
Winners & Losers

What’s up 📈

• VF Corp. ($VFC) skyrocketed 13.64% on the news of selling its Supreme brand to EssilorLuxottica for $1.5 billion.

• GitLab ($GTLB) surged 9.34% amid reports that the software developer is exploring a potential sale to cloud company Datadog, whose shares slipped 7.35%.

• Roche ($RHHBY) jumped 7.55% after announcing significant progress in developing a weight-loss and diabetes treatment that uses a pill instead of an injection. Competitors felt the heat, with Eli Lilly ($LLY) sliding 3.78% and Novo Nordisk ($NVO) dropping 3.87%.

• Johnson & Johnson ($JNJ) climbed a modest 3.67% on a mixed earnings report, which showed better-than-expected results this quarter but also warned of lower profits ahead.

What’s down 📉

• Five Below ($FIVE) nosedived 25.05% after its long-time CEO announced his departure during a challenging year for the company.

• Spirit Airlines ($SAVE) plunged 10.76% to a new all-time low following a warning that both earnings and revenue will fall short of expectations next quarter.

• J.B. Hunt ($JBHT) tumbled 6.88% due to a poor second-quarter earnings report, with earnings and revenue significantly below analyst predictions.

• Elevance Health ($ELV) slid 5.96%, despite surpassing analyst expectations this quarter, as it issued a warning about a decline in Medicaid membership.

• Charles Schwab ($SCHW) declined 5.34%, extending its downward trend. The latest drop came after Bank of America analysts downgraded its price target.

STOCKS
“AI” Caramba — The Bubble About to Burst?

Just when you thought the tech rally would never stop, reality decided to hit the brakes. This year, the market soared to new heights, thanks in no small part to a group of heavy-hitting stocks dubbed the Magnificent 7. These tech titans rode the AI wave to a staggering 76% gain in 2023, outshining the S&P 500's modest 23% rise. Nvidia led the charge, rocketing up 145%, while Tesla lagged slightly, dipping about 1%.

However, this week saw a sharp turn. Nvidia, Apple, and Taiwan Semiconductor Manufacturing Company (TSMC), the big fish in the chipmaking pond, all took a dive, dragging the Nasdaq down 2.7% and the S&P 500 by 1.4%.

What spooked investors?

• President Biden's talk about trade restrictions on chipmakers. And it's not just Biden; Donald Trump shares the same sentiment. With both presidential candidates on the same page, it seems likely these policies will stick, spelling trouble for chipmakers that rely heavily on foreign markets and suppliers.

• Investors, jittery over the bloated valuations of AI stocks, started cashing out at the first sign of trouble. Nvidia took a 6.64% hit, while ASML plunged 12.74% after news broke that Biden might wield a stringent US law to impose export controls. TSMC didn't fare much better, sinking 7.92% after Trump suggested Taiwan should "pay for its own defense" and accused the country of "stealing our chip business."

• As tech stocks took a beating, investors started eyeing smaller prey, pushing the Russell 2000 up by about 8% over the past week. It seems the search for the next big thing is leading them to undervalued small-cap stocks.

Is AI Just a Hype Bubble?

Despite the dramatic downturn, many analysts still have "buy" ratings on Nvidia, Apple, and TSMC. There's no fundamental issue with these companies—at least not yet. The upcoming earnings season will be crucial. If AI companies even hint at a slowdown, expect the selloff to accelerate.

In the meantime, savvy investors might want to explore other corners of the market. Investment firms are recommending small caps and utilities as a way to hedge against the AI rollercoaster. So, while the tech rally might be cooling, there could be hot opportunities elsewhere.

NEWS
Market Movements

• ASML ($ASML) bookings surge as AI chip demand increased purchases of its essential semiconductor tools

• Retail sales, excluding autos, saw their biggest rise in three months this June, showcasing resilient consumer spending despite inflation

• Phillip Morris International ($PM), producer of Zyn, is investing $600 million in a new Colorado plant to meet the growing demand for its nicotine pouches

• Trump is considering JPMorgan ($JPM) CEO Jamie Dimon for the position of Treasury Secretary

• Record labels are taking legal action against Verizon, claiming $2.6 billion in damages for ignoring piracy

• A hack exposed thousands of Disney’s ($DIS) internal Slack messages, contributing to a record year for US data breaches, with 82% involving cloud-stored data

• Despite rampant inflation, Turkey's wealth has grown an impressive 157%, the highest in the world

• Trump cautions the US Federal Reserve Chair against cutting interest rates ahead of the upcoming election

• Tinder introduces an AI feature to help users select their most appealing profile pictures (Match Group, $MTCH)

• The WNBA is nearing a lucrative $2.2 billion media rights deal set to span the next 11 years

RETAIL
Amazon Prime Time

It’s time for the event that makes online shoppers euphoric and investors smile: Amazon Prime Day. This annual extravaganza, now in its 10th year, promises to bring in nearly $14 billion in sales over its two-day run. Shoppers can look forward to deep discounts on everything from Ring doorbells to Fire TV cubes (whatever those are).

Historically, Amazon’s ($AMZN) stock has seen a nice bump post-Prime Day, with an average 1.6% gain in the week after and 4.3% in the month following. This year, Amazon's shares are already up more than 28%, and the company recently hit a market cap of $2 trillion.

Investment Opportunity

• Amazon’s operating income is expected to reach $62 billion this year, up 68% from last year. This boost isn’t just from retail but also from Amazon’s ventures into AI and cloud services. The company's AI initiatives and AWS offerings are key drivers of its market performance.

• Despite these gains, Amazon’s stock is trading at a relative discount. It’s a good time to consider investing if you’ve already maxed out on your tech gadgets and beauty products. Analysts see a 15% upside, with more than 95% recommending a buy.

Retail Ruler

Prime Day underscores Amazon’s e-commerce dominance. Last year, online stores accounted for 40.3% of Amazon’s revenue, while AWS contributed 16%. Prime Day is expected to spur an early start to back-to-school shopping and boost Amazon’s overall sales figures.

JPMorgan projects $12.4 billion in total gross merchandise value for this event, a 12% increase, with $7.9 billion in retail net sales. The continued growth and expanding market share highlight Amazon’s potential to surpass Walmart as the largest US retailer this year.

So, while you’re scoring deals on Prime Day, remember that Amazon’s retail prowess and strategic investments are also delivering solid returns for investors. If you’re thinking long-term, adding some AMZN to your portfolio might be a savvy move.

EARNINGS
Up, Up, and Not Quite Away — United's Q2 Soars, Q3 Stalls

United Airlines' profit soared by 23% in Q2, riding high on strong travel demand, especially for international flights. Yet, their third-quarter outlook has analysts buckling up for a bumpy ride.

Key Points:

• United Airlines experienced a robust boost in Q2 profit, fueled by a surge in international travel.

• Despite this success, the third-quarter forecast has disappointed, reflecting an industry grappling with overcapacity in the U.S. market.

The Numbers:

• Earnings per share: $4.14 (adjusted) vs. $3.93 expected

• Revenue: $14.99 billion vs. $15.06 billion expected

• Net Income: $1.32 billion, or $3.96 per share, up from $1.08 billion, or $3.24 per share, last year

- United's Q2 revenue of $14.99 billion marked a 5.7% increase from last year, slightly below Wall Street's expectations. Adjusted earnings also surpassed forecasts, landing at $4.14 per share versus the predicted $3.93.

-Despite these positive results, United's Q3 earnings forecast of $2.75 to $3.25 per share falls short of the $3.44 analysts had anticipated. This cautious outlook reflects challenges with domestic flight overcapacity impacting fare prices.

Full-Year Forecast: United is sticking to its full-year adjusted earnings projection of $9 to $11 per share, maintaining optimism despite short-term hurdles.

Industry Context:

• United and Delta have been bright spots in a sector otherwise weighed down by too many U.S. domestic flights. Both airlines have upped their international offerings and premium services, capitalizing on post-pandemic travel trends. United's premium revenue jumped over 8%, while sales from budget tickets surged 38%.

• In Q2, United expanded domestic operations by more than 5%, although unit revenues dipped by over 1%. European flight yields rose by more than 5%, highlighting the strength of their international segment.

Looking Ahead:

• United's CEO, Scott Kirby, noted that airlines are cutting back on loss-making routes, predicting a market correction by mid-August. He expects United to lead in unit revenue performance among major peers in the latter half of Q3.

• Meanwhile, competitors like Spirit Airlines have lowered their forecasts due to weaker-than-expected revenue from ancillary fees. Southwest and American Airlines have also reduced their Q2 estimates, with their results due on July 25.

Bottom Line: United Airlines has navigated a profitable Q2 thanks to international demand but faces turbulence ahead with a cautious Q3 outlook amidst industry overcapacity.

Calendar
On The Horizon

Tomorrow

Earnings are rolling in on Thursday, while economic data are sitting quietly in the backseat. Tomorrow brings the Philadelphia Fed’s July business outlook report and the weekly initial jobless claims report.

Before the Open

• Taiwan Semiconductor Manufacturing Company ($TSM): A titan in the chip industry, TSM’s earnings will signal if the AI trade still has juice. Wall Street’s split: all 11 analysts rate it a “buy,” yet their price targets are below current trading levels. Consensus: $1.38 EPS, $20.02 billion in revenue.

• Domino’s Pizza ($DPZ): Shares have soared nearly 20% this year, driven by strong earnings as inflation-weary Americans flock to low-cost meals. Investors will want more of the same this quarter, especially regarding the loyalty rewards program. Consensus: $3.62 EPS, $1.10 billion in revenue.

After the Close

• Netflix ($NFLX): The streaming kingpin remains dominant as rivals scramble for a piece of the pie. Shareholders will be keen on updates about its ad-based business and its impact on the bottom line. Consensus: $4.42 EPS, $8.89 billion in revenue.