Jason's World

The power of an earnings report of a single major stock to influence the broader industry it is in has been evident in May, when Nvidia carried a lot of AI plays on its back, such as Palantir and AMD.

The entire stock market, and the tech industry in particular, performed extremely well this year, as the economy has been able to consistently exceed expectations. But where the rally really started was in May, when markets became fascinated by the potential that AI might bring. Many of this bullishness was spurred by Nvidia’s stellar earnings. In this respect, it’s safe to say that Nvidia carried the entire stock market on its back.

Earlier this month, there has been a rally within the EV industry as major EV companies Tesla and Rivian produced blockbuster sales data. This spurred more than a doubling in Rivian’s stock and a nearly 80% increase in Tesla’s stock in 2 months, a sharp reversal from the tumult in 2022 fueled by the antics of its CEO, Elon Musk. This served as a good sideshow to the AI frenzy that was happening…until it didn’t.

The earnings report by Tesla today showed a strong increase in sales and earnings that exceeded estimates. CEO Elon Musk reaffirmed the company’s production goal of 1.8 million for the year. But what really grabbed the attention of investors was the fact that Q3 production would be reduced due to factory upgrades, and the lack of a date on which Cybertruck deliveries would start.

And the markets lost it-Tesla is now down 9% as of now. It’s not like Tesla’s top line numbers disappointed-it was a good quarter for Tesla, at least on paper. But the status of the Cybertruck and the factory upgrades-which are supposed to be a long-term investment-became reasons for investors to panic.

With Tesla’s meltdown, the entire tech industry followed, and with it the indices, with the notable exception of the Dow, which was up 300 points at one point today due to rallies in non-tech industries. But now the drag from tech has turned an excellent day for the Dow into merely a good one.

If you’re trying to buy the dip, this should give you some pause, because it just shows how fickle the current AI-hype-filled bull market is. As the imaginations of the market run free, expectations rise to unimaginable levels as investors rush into the next big thing. But when companies, especially larger ones, show even one sign of not living up to these expectations, it triggers mass panic. 

Not only is there this sense of disappointment, there are also fear factors at play relating to the economy and interest rates. Months of better than expected inflation data and strong job data led analysts to cut back on recession predictions recently. But fears about Tesla’s production slowing may lead investors to rehash fears about a recession that dominated news cycles in the not-so-distant past, think about the interest rates that show no signs of going down, and have jitters about the state of the economy outside of the United States. And therefore, what we saw today is a wider recalibration of the expectations of the market in general in reaction to the Tesla earnings report. We saw a bubble pop in the sense that investors are wavering in their exorbitant expectations for the future, and are behaving accordingly.