The stock market rally showed signs of slowing down on Wednesday, as the Dow Jones futures fell slightly along with the S&P 500 and Nasdaq futures. This comes after Tuesday’s powerful broad gains across the market. The pause was potentially sparked by a rebound in Treasury yields as well as Microsoft’s announcement of new AI chips designed to compete with Nvidia. The Dow Jones falls as Microsoft AI chips challenge Nvidia, this news added to the pressure on the market leading to the pullback.
Major tech companies like Cisco Systems, Palo Alto Networks and Alibaba saw their stocks tumble in extended trading following their latest earnings reports. Retail giant Walmart also retreated despite beating expectations.
All eyes were on the meeting between President Joe Biden and China’s Xi Jinping on Wednesday near San Francisco. The two leaders discussed a range of economic and security matters impacting relations between the two global superpowers.
But the biggest market-moving news came from Microsoft, which revealed new in-house AI chips along with an ARM-based chip, aiming to reduce reliance on Nvidia. The Microsoft AI chip announcements caused stocks like Nvidia, Advanced Micro Devices, Super Micro Computer and ARM to make big moves.
Tesla managed to reclaim the 50-day line, while Chinese electric vehicle makers Li Auto and BYD flashed buy signals and continued recent momentum.
Here is a deeper look at these key market events and how they may impact stocks going forward.
Major Indexes See Subdued Activity After Rally
The Dow Jones Industrial Average rose a modest 0.5% on Wednesday, closing at 33,845. The S&P 500 index added 0.2% to 3,991, while the tech-heavy Nasdaq composite edged up just 0.1% to 11,507.
It was a much more subdued day of trading versus the previous session, when the market rally saw broad gains across the board. The Nasdaq did briefly move above its September high intraday before pulling back. The Nasdaq 100 index came within a hair’s breadth of hitting its 52-week peak from July.
The small-cap Russell 2000 rose 0.2% to 1,869, paring back significant intraday gains after hitting resistance around the 200-day moving average. The equal-weighted S&P 500 ETF (RSP) climbed 0.5% to close at 143.49, just below its 200-day line. On Tuesday, the Russell 2000 and RSP reclaimed their 50-day lines decisively.
The pause in momentum for stocks that have been surging recently, along with improving market breadth, seems constructive for the rally’s durability. It could be creating new buying opportunities across the market.
10-Year Treasury Yield Rebounds After Huge Drop
After plunging 19 basis points on Tuesday, the 10-year Treasury yield bounced back 9.5 basis points to 4.535% on Wednesday. This relieved some of the downward pressure on bank stocks in particular. Still, rates remain significantly below their recent highs.
The drop in yields earlier this week came amid lower-than-expected inflation data, which led investors to scale back expectations for how high the Federal Reserve will take interest rates. However, with the Fed still strongly committed to fighting inflation, yields are expected to remain relatively elevated compared to historical averages.
Big Tech Earnings Roundup
Among the most highly anticipated earnings reports this week were from major tech and internet companies. After Wednesday’s closing bell, cybersecurity leader Palo Alto Networks disappointed investors by cutting its full-year billings forecast, overshadowing its strong fiscal first-quarter results. Shares of PANW fell over 5% in late trading as a result.
Networking infrastructure giant Cisco Systems topped fiscal first-quarter expectations but cut its full-year guidance, sending CSCO stock down over 5% as well. Walmart edged past expectations for earnings and revenue, helped by e-commerce, but its outlook was still below analyst consensus. WMT dropped 3% on the news.
Chinese e-commerce titan Alibaba beat Q2 earnings views but missed on revenue. It also canceled plans for a full spinoff of its cloud computing division. BABA stock plunged nearly 9% on this mixed report.
The busy week of big tech earnings will continue Thursday night with reports from Nvidia, Workday and Applied Materials that may cause more volatility.
Microsoft Unveils AI Chips To Challenge Nvidia’s Dominance
The major tech development from Microsoft’s Ignite 2023 conference was the unveiling of its homegrown Azure Maia AI chip and ARM-based Azure Cobalt CPU. This strategic move aims to make Microsoft less dependent on Nvidia for artificial intelligence chips.
Azure Maia is set to power Microsoft services like Copilot and Azure OpenAI when it rolls out to data centers in early 2024. The Azure Cobalt data center chip also arrives next year. This news exerted downward pressure on Nvidia stock, which sank 1.55% to $488.88 despite hitting an all-time high on Tuesday.
Microsoft has been a major customer for Nvidia’s AI chips used in data centers and cloud platforms. By developing its own advanced AI processors, Microsoft can reduce costs while customizing performance for its AI needs.
The threat of lost business with Microsoft sent Nvidia shares lower. But this competitive move could also spur Nvidia to enhance its AI chip technology even further. Nvidia remains the clear leader in advanced AI processors and will report its next quarterly results on November 17.
Stock In Focus: Tesla Reclaims 50-Day Line, On Right Track
Tesla stock extended its recent rebound by climbing 2.3% on Wednesday to $242.84. Shares closed above the 50-day moving average for the first time in weeks. The EV pioneer has now risen for four straight sessions, all on higher than average volume.
The stock is building the right side of a potential double-bottom base, working on a possible new buy point at $278.98. A downward-sloping trendline above the current price around $255 could offer investors a lower entry.
Tesla had tumbled roughly 50% from its November 2021 peak near $405 down to $185 by early November 2022. But bulls have defended the lows, with positive deliveries, China demand trends and brand strength signaling a comeback may be underway. If Tesla can break out of this base, it could pave the way for the next leg up.
Chinese EV Makers Charge Higher
It wasn’t just Tesla powering gains for electric vehicle stocks. Upstart Chinese EV companies Li Auto and BYD extended their recent strength.
Li Auto climbed 1.7% to $40.53, moving above an early entry at $40.14 in its base ahead of its first all-electric vehicle launch. BYD advanced 1.1% to $32.30, retaking its 50-day line decisively and flashing an aggressive entry signal.
Li Auto and BYD have been growing rapidly in the booming Chinese EV market, taking share from traditional automakers with popular new models. BYD is set to hold an “Ocean-X” event Friday likely to showcase new vehicles. Li Auto’s first EV presales also begin November 18.
With Tesla, BYD and Li Auto reasserting their leadership in EVs recently, the industry appears to be picking up momentum again after a brutal 2022. More positive catalysts could keep EV stocks charging higher through the end of the year.
The major indexes taking a breather at resistance levels following Tuesday’s explosive advance is likely a healthy sign for the rally. Allowing some steam to come out while still holding near highs shows underlying support remains strong.
The ability of the Nasdaq to poke above September peaks indicates the tech sector is strengthening again after months of struggles. Banks and other areas sensitive to yields pulling back also means there is less upward rate pressure on growth stocks.
New opportunities are emerging in pockets of the market as technical patterns consolidate and emerge. With Microsoft vs. Nvidia underscoring the intense competition in AI, chipmakers may see renewed volatility and rotations in leadership.
Meanwhile fast-growing innovators like Tesla, BYD and Li Auto regaining their momentum illustrates the advantage of focusing on best-in-class companies with secular growth tailwinds. Rising stars in fields like EVs, AI, cloud computing and cybersecurity could drive the next leg in the new bull market.
Investors should stay nimble, balancing patience for bases to form with decisiveness capitalizing when breakouts occur. The recent start-and-stop nature of the rally means exploiting both lulls and advances will be key. But with the Fed still hiking rates and economic uncertainty lingering, periods of heavy selling could quickly return.
Maintaining exposure alongside cash reserves will help weather any downdrafts. The past week shows how quickly fear can shift back to opportunistic buying. Avoid getting shaken out of leading stocks prematurely. With earnings causing huge overnight swings, having some dry powder allows investors to seize on positive reactions.
The market’s resilience in recent months suggests there is substantial upside ahead. But the road to new highs likely won’t be straight and smooth. Staying flexible and selective within a diversified portfolio can ultimately lead to outperformance.