In this edition of Market Factors we’ll discuss the threat presented by tech stock weakness and why the new president might not care that much about tariffs. The diversion features one of the worst technology ideas ever and we’ll look ahead to data releases.
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Tech
Wobbling Magnificent Seven
Evidence of weakness among previously dominant megacap tech stocks continues to pile up, suggesting a potential change in sector leadership and a rough road ahead for the S&P 500.
Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, provided a disquieting list of reasons to be concerned about tech stocks. In January, the S&P Information Technology Index underperformed the broader S&P 500 by almost six percentage points, the widest margin in eight years.
Price breakdowns have been common among the Magnificent Seven stocks. Five of them at this point – Microsoft Co., Nvidia Corp., Alphabet, Tesla Inc. and Apple Inc. – are trading below their 50-day moving averages. Ms. Shalett notes that hedge funds are reducing exposure to tech stocks and insider selling in the sector has reached levels last seen at the end of 2021, right before a painful 34.3 per cent correction in the tech index.
BofA Securities head of equity strategy Savita Subramanian notes that capital spending guidance for the AI hyperscalers, indicating a planned US$290-billion in investment, implies that the AI capital spending cycle remains. She adds, however, that “DeepSeek reminds us of the bear case” for AI semiconductors, as “geopolitical risks in the midst of an AI arms race vs. China poses a threat.”
Ms. Subramanian cited investor concerns about monetizing the AI trend. The massive spending on AI infrastructure is expected to shrink profit margins for the industry leaders as profits, if they ever happen, are down the road. Of the hyperscalers, only Meta Platforms’ stock price climbed after reporting results in the most recent earnings season.
I’m not suggesting the current market is similar to February of 2000 before the internet bubble imploded and crushed index performance for the following three years. The current tech leadership is far less speculative – the fundamentals justify the stock prices to a far greater degree this time. But as RB Advisors emphasized recently, volatility during sector leadership changes jumps significantly.
The relative performance of the S&P 500 Equal Weight Index and the conventional market cap weighted benchmark will be important to follow in the coming weeks. Equal weight outperformance will suggest more technology sector floundering and the need for diversification.
President Donald Trump gestures as he boards Air Force One at the Naval Air Station Joint Reserve Base in New Orleans, Sunday, Feb. 9, 2025.Ben Curtis/The Associated Press
Trump motives
Tariffs are just a policy tool
Morgan Stanley U.S. public policy expert and strategist Michael Zezas argued that President Donald Trump is more concerned with border security than trade deficits. He believes that tariffs on Canada “will either be avoided or not endure for long.”
The announcement that tariffs would be delayed was accompanied by news on border issues, not trade, which is why Mr. Zezas thinks trade is just the political cudgel to get Canada to better police the border.
The strategist believes the U.S. is equally hesitant about tariffs on Mexico because of the disruption this would cause to U.S. supply chains. China is another story, as trade remains the central issue. President Trump has had no qualms about applying levies to Chinese goods.
Morgan Stanley economists have removed a March Federal Reserve rate cut from their base case for 2025 due to trade uncertainty and the potential for trade-related inflation.
Diversions
Worst workplace idea ever
The latest entry in the contest for the most depressingly dystopian idea of all time comes from Paul Brandt-Rauf, the dean of Biomedical Engineering at Philadelphia-based Drexel University.
Professor Brandt-Rauf is an expert in neuroergonomics, the study of brain activity while people carry out tasks. In a development reminiscent of Dickens novels, noninvasive wearable devices are now available, allowing your boss to follow along with your brain waves while you work. I am imagining what a brain wave sweatshop might look like.
The professor focuses on the positives, noting that the technology can be used to assess fatigue and optimize cognitive performance. He also admits that “the potential for abuse is significant.. You think?
The neuroergonomics is predicted to grow to US$21-billion by 2026.
The essentials
Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.
Globe investor highlights
Tim Shufelt explains how investors can make a low loonie work for them
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Ian McGugan shares his thoughts on ways investors can respond to Trump’s self-centred economic policy
David Berman reminds us that gold is an easy way to bet on caution in these unpredictable times
John Heinzl looks at the bull case for Brookfield Infrastructure Partners
What’s up next
There’s not much for economic data but a lot of important earnings reports domestically this week. Building permits for December (a rise of 2.0 per cent month over month expected), manufacturing sales for December (up 0.7 per cent) and international securities transactions are about it for economics.
The important earnings reports start with Shopify Inc. on Tuesday (US$0.425 per share expected). Wednesday will see results from Barrick Gold Corp. (US$0.431), Brookfield Asset Management Ltd. (US$0.388) and Sun Life Financial Inc. (C$1.769). On Thursday, Constellation Software (US$22.88), Telus Corp. (C$0.219) and Brookfield Corp. (US$0.87) release results. Friday will see earnings reports from TC Energy Corp. (C$0.984) and Enbridge Inc. (C$0.748).
South of the border, CPI for January will be released on Wednesday and a rise of 0.3 per cent month over month is expected. PPI ex-food and energy for January is out Thursday (also 0.3 per cent month over month expected) and the month over month retail sales data for January is expected to be flat when reported Friday. Industrial production (0.3 per cent month over month) is also out Friday.
Prominent U.S. corporate results include Coca Cola Co. on Tuesday ($0.519 per share expected), Cisco Systems Inc. ($0.907) on Wednesday and cybersecurity giant Palo Alto Networks Inc. on Friday ($0.802).
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)