Good morning investors,
Markets managed to sneak into the green on Tuesday after volatile trading, with the S&P 500, Dow, and Nasdaq all rising 0.1%. The modest gains masked what remains a difficult environment for technology stocks, though Apple provided some relief with news of AI powered wearables in development. Amazon finally snapped its brutal nine day losing streak, the worst such stretch since 2006, after shedding roughly $450 billion in market capitalization over the prior two weeks. When selling becomes that indiscriminate, the setup for reversal becomes compelling.
The smart money appears to agree. Bill Ackman's Pershing Square grew its Amazon stake by 65% during the fourth quarter, making it the fund's third largest holding. David Tepper's Appaloosa Management increased its Micron position. These are not speculative traders chasing momentum. They are institutional capital deploying into names that have been severely punished. When Ackman adds Meta and Amazon to his portfolio within weeks of each other, it sends a clear signal about where he sees value in this sell off.
Opening Bell
Futures are pointing higher this morning, with Dow ($DIA ( ▲ 0.61% )) futures up 253 points, S&P 500 ($SPY ( ▲ 0.79% )) futures climbing 0.6%, and Nasdaq 100 ($QQQ ( ▲ 1.19% )) futures advancing 0.6%. The recovery is being led by beaten down tech names, with Amazon up more than 1.6% in premarket trading on the Ackman news and Micron gaining over 1% following Tepper's increased stake.
Today's economic calendar features the minutes from the Fed's January meeting, which will be parsed for any discussion of AI's impact on monetary policy. Housing starts, durable goods orders, and industrial production round out the data releases. The earnings calendar is robust, with Carvana, DoorDash, Booking Holdings, Occidental Petroleum, Figma, and Wingstop among the names reporting.
The Fed minutes arrive at an interesting moment. On Tuesday, Fed Governor Michael Barr pushed back on the idea that AI might allow for lower rates, noting he expects inflationary effects from the massively expensive infrastructure buildout. San Francisco Fed President Mary Daly echoed the sentiment, saying the Fed needs to better understand AI effects on the economy's trajectory. This sets up a potential debate between current Fed leadership and incoming chair Kevin Warsh, who has suggested AI might support lower rates through productivity gains.
Amazon: The Clearest Casualty
Wall Street has soured on Amazon ($AMZN ( ▲ 2.21% )) more than its Magnificent Seven peers, and understanding why illuminates the broader market psychology. The stock dropped 17% in February, erasing roughly $450 billion in market capitalization before finally snapping its losing streak yesterday. Among mega cap names, Amazon has emerged as the clearest casualty of the market's disillusionment with AI spending.
Amazon is preparing to outspend every other corporation in the AI infrastructure buildout, guiding toward roughly $200 billion in capital expenditures for 2026. By comparison, Alphabet and Microsoft have forecasted spending of $175 billion and $140 billion respectively. Those are also eye watering numbers, but both companies command relatively high margin software franchises that generate substantial cash even before AI returns materialize: Office subscriptions, enterprise contracts, search advertising, and cloud revenue.
Unlike other Magnificent Seven companies, Amazon must fund its AI buildout alongside a vast, lower margin retail and logistics business. Every dollar put into AI must coexist with the relatively thin margins of warehouses, trucks, and e-commerce. That realization has left the market increasingly worried about Amazon's free cash flow and the sustainability of its ambitions.
I will go as far as saying I think Amazon is a long term buy here. The nine day losing streak was the worst since 2006, and the selling felt like capitulation rather than rational repricing. When a company's stock loses $450 billion in market value in two weeks while its fundamental business continues executing, the setup for a reversal becomes compelling. Ackman clearly agrees.
Meta-Nvidia Partnership: Infrastructure Alignment
Meta ($META ( ▲ 0.14% )) signed a sweeping multiyear infrastructure agreement with Nvidia to deploy millions of chips across its global AI data center network. This is not just a chip purchase. It is infrastructure alignment. By committing at this scale, Meta is effectively standardizing much of its AI backbone around Nvidia's architecture, strengthening Nvidia's moat while giving Meta supply certainty in a constrained environment.
The standalone CPU adoption is particularly notable. Meta will deploy Nvidia's Grace CPUs as standalone processors at scale for the first time, validating Nvidia's strategy to expand beyond GPUs into full data center platforms. When hyperscalers begin deploying CPUs, networking, and accelerators from one vendor, switching costs rise dramatically.
Markets often frame AI spending as a margin risk. Institutional capital tends to view it differently. This type of spend is capacity investment, not discretionary cost. The companies building infrastructure today are positioning to control the economics of AI tomorrow. The short term reaction is predictable: Nvidia rallies, AMD sells off, Meta trades on sentiment swings tied to capex headlines. The longer term reality is that hyperscaler demand continues confirming the same trend. AI is not slowing. It is scaling faster than most forecasts assumed.
Palo Alto Networks: A Different Story
Palo Alto Networks tumbled almost 6% after issuing weak guidance for the current quarter, with adjusted earnings expected between 78-80 cents versus the 92 cent consensus. This is disappointing given my constructive view on cybersecurity. The guidance miss appears related to deal timing and integration costs from recent acquisitions rather than fundamental demand weakness, but it underscores that stock selection within even defensive software subsectors remains critical.
I still believe cybersecurity represents one of the more defensible areas within software, but execution matters. CrowdStrike reports soon and will provide another data point on whether the sector's weakness is company specific or more broadly structural.
US vs. The World: The Rotation Continues
The statistics are striking. US stocks are off to their worst start of the year relative to global markets since 1995. While the S&P 500 has fallen 1% since January, an index tracking returns throughout the rest of the global economy has returned 8%. Over the past year, the ex-US index has risen 30%, triple the 10% return from US equities.
Through the last decade, as Big Tech's explosion drove valuations sky high, US price to earnings ratios are now an average of 40% higher than those throughout the rest of the world. The top 10 largest US companies now account for 40% of S&P 500 holdings, far above the roughly 20% weight a decade ago. That concentration leaves US equities more vulnerable if expectations around the AI trade slip.
This is precisely why I have favored international stocks coming into the year and continue to do so. Valuations have been more attractive and offered better entries. The same applies to small cap US equities. But I do think there comes a point where you have to buy some of these beaten down US tech stocks. If markets were to reprice in a drawdown after the equal-weight S&P 500 gives way, you would need to look for more tech exposure.
Everyone loves to hate tech and then gets taken aback when it reemerges as the front runner of a bull market. I do not think we are at that inflection stage yet, but later this year, we will need tech to drive us through and continue above the 7,000 S&P 500 level. The current setup is creating the entry points that will matter when that rotation occurs.
Warner Bros. and Paramount: The Saga Continues
Warner Bros. handed Paramount another rejection on Tuesday, swatting away its hostile bid of $30 per share while reiterating commitment to the Netflix deal. But Paramount still has another week to submit a best and final offer. The company has opted to sweeten terms, including extra cash if the deal drags and an agreement to cover a Netflix breakup fee, but notably has not increased the per share price.
Warner Bros. disclosed that a senior Paramount representative informed a board member they would pay $31 per share if talks reopened. With Paramount stock up more than 6% on Tuesday, investors remain hopeful for a higher bid. But even if Paramount raises its offer, Netflix retains matching rights. This may end where it started, but the negotiating theater continues.
Final Thought
The great rotation continues. Big Tech stocks are pulling back while the S&P 493 pulls ahead. Small and mid cap names are climbing while mega caps falter. This may well end up being the dominant narrative for investors this year. But rotations eventually rotate, and the entry points being created in quality tech names will matter when institutional capital decides the pessimism has gone too far.
No one knows exactly how this tech pullback plays out, but expectations have reset to a point where good news can go a long way. Forward earnings estimates still show tech as the strongest sector, up about 20% over the last four months. The sector still deserves the benefit of the doubt, even if patience is required. Markets are likely in a holding pattern ahead of Friday's PCE report, but the setups being created now will define returns for the remainder of the year.
As always, feel free to reach out with questions about positioning for these evolving market dynamics.
Best regards,
Dan Sheehan [email protected]
Subscribe: https://substack.com/@dansheehan3
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.