Good morning investors. Stocks started the week slightly up but that could change on a dime over the next few days.

Four of the Magnificent Seven tech giants will report earnings this week, and that will likely fuel volatility and uncertainty — as well as conversations that AI may be a bubble after all.

That’s our big story today. Let’s dive in.

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Why bulls can shrug off the tech sell-off

If you own the most popular tech stocks, this month you’re likely seeing more red in your portfolio than usual. 

But most analysts see this as a blip rather than a pattern. Tech stocks won’t fall out of style that easily.

“Some consolidation in technology was expected compared to the broader market,” said Fundstrat’s head of technical strategy, Mark Newton. 

He doesn’t see the recent slide as foreshadowing further deterioration, even as the Roundhill Magnificent Seven ETF — which tracks Tesla, Microsoft, Meta, Amazon, Apple, Alphabet and Nvidia — has shed roughly 11% since July 10. 

The overall story of the market in July is not as insidious as the chart makes it seem.

Investors expect the Fed to cut rates soon, so they are rotating out of Big Tech and piling into corners of the market that perform better with lower interest rates, such as small-caps. 

Indeed, the small-cap Russell 2000 index has gained about 9.4% since July 10, better than the other stock benchmarks. While a slice of this momentum can be attributed to the so-called Trump Trade, cooling economic data — and thus rising odds for a Fed rate cut — is the main catalyst at play.

Meanwhile, analysts forecast S&P 500 companies to see a robust 9.8% earnings growth this quarter compared to a year ago, according to FactSet. That is a hearty figure, but some investors still fear that AI hype has pushed expectations too high. 

Add that to the recent small-cap boom, and it’s reasonable to be wary of whether earnings will help or hurt the market in the coming days. Microsoft is scheduled to report after hours Tuesday, Meta is due Wednesday, and Apple and Amazon will share results Thursday.

Even the strongest mega-cap balance sheets, the thinking goes, may leave shareholders unsatisfied.

"So far this earnings season, the results for many large bellwether companies have been better than the stock reactions,” said John Belton, a portfolio manager at Gabelli Funds.

“There is an ongoing backdrop of rotation and a more risk-off mentality in the market, which I believe can cause short-lived drawdowns. We have been encouraged by the actual fundamentals in many of these earnings reports.”

Last week, shares of Tesla fell 12% the day after it reported weaker-than-expected second-quarter profits. Alphabet, too, reported softer sales growth and its stock tumbled 5% the following trading session. 

That said, zooming out provides helpful context.

The same ETF depicted in red above remains a winning bet for anyone who bought in a year ago.

It’s up more than 40% since last July, which suggests the recent performance gap between small- and large-cap stocks won’t last forever.

In short, tech earnings still look attractive for the next several quarters, which is promising for shareholders. 

It’s worth highlighting that few investors bet the house on long shots, which are what make up most of the Russell 2000.

After all, the best Russell 2000 companies are the ones that get too big and exit the index. 

Solita Marcelli, the chief investment officer for UBS Global Wealth Management in the Americas, wrote in a note Monday that the recent pullback in tech offers an attractive buying opportunity. 

“We think the environment remains favorable for quality tech stocks, and believe that investors should ensure they have sufficient exposure to AI beneficiaries within and outside the US,” she said.

What performs better over the next 6 months, the S&P 500 or the Russell 2000? Hit reply to this email or let me know on X @philrosenn.

*At a glance:

Elsewhere:

🍔 McDonald’s sales have softened. The stock climbed 3.7% Monday even as the fast-food giant acknowledged that it has become less affordable, and it wants to promote more value offerings moving forward. Its CEO said lower-income customers reduced their visits last year, and that the slowdown has deepened in the last quarter. (WSJ)

🚗 Tesla stock spiked 6%. The move came as Morgan Stanley named the company as its top pick among US automakers, replacing Ford. In the bank’s view, Tesla’s energy and climate-tech business could eventually become larger than its car business. (Reuters)

🏠️ A $1 million starter home is increasingly the norm. That’s how it is across 237 US cities, the most ever. Five years ago, there were only 84 such cities. Since 2019, starter homes have grown 54% in value, above the 49% increase seen for the typical home. (Zillow)

⚡️More than 65 million Americans may face higher electricity bills next year. The biggest US electric grid is seeing rising demand and waning supply, and now it has to consider increasing prices starting in June 2025. Industry watchers predict that prices could jump as much as four times higher, further squeezing everyday Americans. (Bloomberg)

Rapid-fire:

Interview:

I spoke with investor Anthony Pompliano, the co-founder of Opening Bell Daily, about Trump’s bitcoin speech, the stock market under Trump versus Biden, and more.

Last thing:

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