Tech Stocks Rebound Amid Oversold Conditions, Earnings to Test AI Trade Sustainability

The S&P 500 and Nasdaq Composite rallied Monday, largely because artificial intelligence companies rebounded. Monday's recovery looked like a rebound from oversold conditions. A larger advance will depend on this week's major technology earnings easing concerns about the sustainability of the AI trade. This week's results include Meta Platforms and Tesla. SpaceX reports after the market closes Tuesday.

Chip stocks surged, with the iShares Semiconductor ETF (SOXX) on course to end a nine-day decline. The Magnificent Seven and memory chip makers outperformed. The iShares MSCI South Korea ETF (EWY), dominated by SK Hynix and Samsung Electronics, surged 4% after steep declines over the past week. The S&P 500 fell nearly 2% last week, the index's worst weekly decline since late June. The Nasdaq Composite dropped 4.5% over the same five-day period.

Barclays global chairman of research Ajay Rajadhyaksha wrote that technology earnings are key this week. Rajadhyaksha said fundamentals remain unchanged, but fragile price movements prompted Barclays to turn neutral on risk assets and remain neutral on duration. Fairlead Strategies founder Katie Stockton said in a Monday note that this week will be especially important for the S&P 500 and Nasdaq. Stockton said the indexes need to hold support levels to avoid confirming a further breakdown. However, Stockton said widespread short-term oversold conditions suggest support can hold for now.

Of the 47 S&P 500 companies that have reported third-quarter results so far, 85% have beaten expectations. The S&P 500 is on track for a blended earnings growth rate of 29%. Most technology results are still to come, and technology companies face high expectations.

LNW chief investment officer Ron Albahary said investors need proof that companies considered part of the AI trade can deliver earnings growth expectations reflected in share prices. Albahary said the potential bubble concerns earnings expectations, rather than valuations as during the internet bubble. Albahary expects investors to distinguish more carefully among technology companies, a development Albahary considers healthy. Albahary said that approach will produce greater differences between winners and losers within the AI trade. Albahary said some AI beneficiaries may continue rising, while neocloud platforms may fall because of debt taken on to finance infrastructure expansion. Albahary said AI headlines previously moved most AI-related stocks in the same direction. Albahary does not expect that uniformity to continue.

Wells Fargo Investment Institute's Sameer Samana said the AI trade appears to be undergoing a reassessment rather than a complete collapse. However, Samana expects possible further pressure in the coming days or even weeks. Samana, head of global equities and real assets, said Wells Fargo recently downgraded technology because expectations had become too optimistic. Samana said recent selling has reduced some optimism but may continue through the midterm elections because of the politicization of AI and data centers.