We heard Q2 earnings from Alphabet (Google) and Tesla after the close yesterday.

We’ll hear from Microsoft, Meta, Apple and Amazon next week.

From these earnings we’ll learn about the state of the technology revolution (generative AI).  And we’ll find out how much these companies are spending on AI infrastructure.  And much of that spend is on Nvidia chips, which means there will be clues on Nvidia’s second quarter performance (which they will report August 28).   

Let’s take a look at Alphabet’s numbers …

Alphabet grew revenues by 14% compared the same quarter last year. They grew net income by 26%.  And they grew operating margins from 29% to 32%.

As we discussed heading into these big tech earnings, the Wall Street community will scrutinize the big investments necessary to stay at the leading edge of AI infrastructure — and look for return on investment. 

Alphabet spent $13 billion in Q2 mainly on AI infrastructure (chips, servers, data centers) — another huge number.  That’s up from $12 billion in Q1. 

So, the requisite investment to build AI infrastructure continues to rise.  

As for the return on investment:  Sundar Pichai (GOOG CEO) said “year-to-date, our AI infrastructure and generative AI solutions … have already generated billions in revenues.”

When questioned about the big outlays, he said “the risk of under-investing is dramatically greater than the risk of over-investing.”  And he said the technology revolution (driven by generative AI) is still “at an early stage.”

All of this, and the stock went down, despite trading for just 22 times forward earnings (in line with the market multiple).  

Let’s take a look at the Nasdaq chart …

As we discussed in my July 11 note, the Nasdaq put in a bearish technical reversal signal on the inflation report (an “outside day”).  That signal has predicted this 6% decline.

And this takes us into tomorrow’s Q2 GDP report, and Friday’s PCE report (another big inflation report). 

If these two numbers are soft, expect this decline in stocks to continue.  This yellow trendline support comes in 3% lower from today’s close.  And this line has significance.  It represents the trend from the October lows, which was marked by the Fed’s signaling that the tightening cycle was over.

And with that, we could head into next Wednesday’s Fed meeting with stocks threatening to break this trend, due in large part to a Fed that has stubbornly held rates too high for too long.

Add to that, the Bank of Japan will decide on policy the same day (before the Fed).  And they are expected to announce the plan to start reducing the decade long QE program that has been an important liquidity provider to global markets.

As we’ve discussed over the past few months, with the BOJ exiting its role as the global liquidity provider, “global central banks (led by the Fed) may now have less leeway to hold rates too high, for too long.” 

The risk of global liquidity swinging the direction of too tight (i.e. a liquidity shock) goes up.

With all of the above in mind, the market is pricing in almost no chance of a rate cut next week by the Fed (a 7% chance).  It seems underpriced.