'Fast Money' traders talk what's ahead for Big Tech earnings on deck

Key Concepts

• Mag 7: Refers to the seven largest US technology companies – Apple, Microsoft, Alphabet (Google), Amazon, Nvidia, Tesla, and Meta.
• Azure: Microsoft’s cloud computing service, a key driver of growth.
• Copilot: Microsoft’s AI companion, integrated into various products.
• Bear Cross/Death Cross: A technical chart pattern where the 50-day moving average crosses below the 200-day moving average, often signaling a potential downturn.
• Russell 2000: A small-cap stock market index, often seen as an indicator of broader economic health and a potential alternative to the Mag 7.
• AI CapEx: Capital expenditure related to Artificial Intelligence infrastructure and development.
• Forward P/E Ratio: A valuation metric comparing a company’s stock price to its expected future earnings.
• Options Market Sentiment: Analysis of call and put option activity to gauge market expectations regarding price movements.

Market Performance and the Mag 7 – A Weekly Review

The week saw mixed performance within the “Mag 7” stocks. The overall group was up over 6%, with gains in Tesla and Microsoft. However, Apple stood out as an underperformer, declining nearly 3%. The discussion centered on whether these stocks can regain momentum after a period of sideways trading since October.

Microsoft: A Defensive Play with AI Potential

Microsoft was identified as a potentially attractive investment, despite recent underperformance. The analysis highlighted several key points:

• Disappointment & Expectations: Microsoft has been a significant disappointment relative to initial expectations, particularly considering its role as a major beneficiary of the AI trade and margin expansion driven by Azure.
• Technical Analysis: While the stock experienced a “bear cross” (50-day moving average crossing below the 200-day moving average), the price action on the day of the discussion was considered positive, suggesting some defensive strength.
• Valuation: Microsoft’s valuation, currently around 26-27 times forward earnings, is seen as reasonable, with a premium justified by its growth. This contrasts with the broader market and some other Mag 7 stocks.
• Azure Growth & AI Monetization: Continued growth in Azure is crucial. The market is looking for evidence of AI monetization within enterprise clients, which hasn’t yet matched the success seen with retail users. A deceleration in Azure growth would be a significant concern, as it has historically triggered pullbacks.
• Investment Strategy: One participant stated they owned Microsoft going into earnings and would likely add to their position, anticipating a relatively low bar for performance. They noted that a significant pre-earnings run-up (15-20%) would be more concerning.

Russell 2000 vs. Mag 7: A Valuation Shift

The outperformance of the Russell 2000 index was discussed as a signal of perceived overvaluation in the Mag 7 stocks.

• Valuation Disparity: The Russell 2000 trades at approximately 15 times earnings, while the Mag 7 trade at 30-35 times earnings. This difference suggests a potential shift in investor preference towards smaller-cap stocks.
• Zero-Sum Game: The question was raised whether the Russell’s outperformance is a zero-sum game, meaning a reversal in Russell’s performance would lead to a corresponding gain for the Mag 7. The consensus was that this is likely, as historical patterns show a correlation between the two.
• Investor Preference: Despite valuation concerns, investors often gravitate towards familiar names ("buying what they know").

Meta: Earnings Concerns & Options Market Volatility

Meta (Facebook) was identified as the Mag 7 stock with the most concern surrounding its upcoming earnings report.

• Spending Concerns: The primary bear case for Meta revolves around its future spending plans. While the quarter is expected to be good, investors are focused on what management will say about ongoing expenses.
• Options Market Volatility: The options market is pricing in the largest potential move (over 6%) for Meta compared to the other four stocks analyzed, indicating significant uncertainty.
• Sentiment Analysis: Apple and Tesla exhibited the most dubious sentiment in the options market, while Microsoft’s flow was relatively bullish.

Apple & Tesla: Sentiment & Uncertainty

The options market indicated the most uncertainty surrounding Apple and Tesla, with the highest levels of call and put activity suggesting a wide range of potential outcomes.

Microsoft’s Competitive Advantage & Growth

Microsoft is seen as deserving of a premium valuation due to its strong growth in revenue, earnings, and free cash flow, all exceeding the S&P 500 overall. The company’s “significant flywheel” – a self-reinforcing cycle of growth – is expected to continue, despite scrutiny of AI-related capital expenditures.

Logical Connections & Synthesis

The discussion flowed from a broad market overview of the Mag 7 to a focused analysis of Microsoft, Meta, Apple, and Tesla. The conversation highlighted the interplay between technical analysis, fundamental valuation, and market sentiment. The Russell 2000’s performance was presented as a potential counterweight to the Mag 7’s dominance, driven by valuation concerns. The overall takeaway is that while the Mag 7 remain important players, investors are increasingly scrutinizing valuations and seeking alternative opportunities, particularly in smaller-cap stocks. Microsoft, despite recent underperformance, is viewed as a relatively safe and well-positioned investment within the group, while Meta faces greater uncertainty surrounding its future spending.