Elevated Downside Risk
Market anxiety is growing due to big tech earnings calls.
The volatility index (VIX) surpassed 18 on Thursday. This level is similar to mid-April when stock prices fell. Last week, the stock prices of big tech companies like Alphabet and Tesla fell because their earnings reports did not meet market expectations. Even leading AI chip stocks such as Nvidia and TSMC have seen their rising trends slow down. They are now in a correction phase. Recently, Nvidia’s stock dropped about 17% from its recent high, while TSMC’s stock fell about 16%.
This week is a pivotal moment as more big tech companies are set to announce their earnings.
The profitability of AI will be put to the test. Not only big tech companies related to AI and semiconductors, but also major companies benefiting from AI infrastructure, will release their earnings. This includes networking software companies related to data centers and power utility sector companies. Earnings reports are scheduled for Microsoft, Arista Networks, and First Solar on Tuesday. Meta, Qualcomm, and ARM will report on Wednesday. Amazon, Apple, Intel, and Eaton Corporation will release their reports on Thursday.
High market expectations for big tech earnings are causing stock prices to fall.
Despite Alphabet(Googl)’s strong performance exceeding market consensus, its stock price fell by about 5% on the earnings call day. This drop was due to lower-than-expected YouTube ad revenue and increased capital spending on AI. Vertiv (VRT) recorded higher second-quarter revenue and net profit than the market consensus. It also raised its annual revenue and margin guidance. However, its stock price dropped more than 11% due to concerns about reduced new order growth in the third quarter.
Concerns about margin growth being suppressed in third-quarter guidance are leading to stock price corrections.
U.S. stock prices have recently risen sharply, driven by expectations for improved profitability from AI, especially among the “Magnificent 7”. While companies are showing results exceeding the consensus, there is a risk If major big tech companies do not show future growth potential that satisfies the market this week. The U.S. stock market may lose its upward momentum and enter a correction phase.
However, if you believe that the stock market downturn is only a temporary correction, the following tips may be helpful.
Tips for Handling Market Corrections 1: Investing in a Rebound
You can invest in the future rebound if the stock market generally declines after big tech earnings announcements.
As market anxiety grows, the VIX index increases, and you can take advantage of this. The -1x Short VIX Futures ETF (SVIX) is a 1x short product on the VIX index. Its price falls when the VIX index rises and rises when the VIX index falls. If you believe the U.S. stock market is still in a bull market, buying SVIX when market anxiety increases and the VIX index rises can yield profits when the stock market rebounds.
Similarly, if you believe the AI semiconductor sector will recover, you may consider the VanEck Semiconductor ETF (SMH), which has a high weighting of Nvidia and TSMC, or the ProShares Ultra Semiconductors (USD), which has a high weighting of Nvidia and Broadcom. Aggressive investors might pay attention to the Direxion Daily Semiconductor Bull 3X Shares (SOXL), which bets on 3x leverage. SOXL includes a balanced mix of assets like Broadcom, Nvidia, AMD, AM, Lam Research, and TSMC.
Tips for Handling Market Corrections 2: Increasing the Proportion of REIT Assets
Increasing the proportion of investments in REIT assets in the real estate and infrastructure sectors, which are sensitive to interest rates, is expected to be beneficial.
The U.S. economy is expected to experience a “Goldilocks” period due to slowing inflation in June’s PCE index and strong GDP growth. This has increased confidence in a possible rate cut in September, with growing expectations of three rate cuts within the year. As interest rates decrease, the prices of real estate assets are likely to rise, and dividend income would increase due to reduced interest costs, leading to an increase in REIT prices.
REIT ETFs based on real estate assets, REITs operating in sectors with low vacancy rates, and REITs related to high-growth data centers are expected to be promising. For example, ETFs like the Pacer Industrial Real Estate ETF (INDS) and the Real Estate Select Sector SPDR Fund (XLRE) are notable, as are Realty Income Corporation (O) focused on retail and Digital Realty Trust, Inc. (DLR) focused on data centers.
*References: Cboe, Earnings Whispers, Google Finance, Yahoo Finance
**Disclaimer: Investment decisions are the responsibility of the individual, and the content of this blog is for reference purposes only.