Breakout Or Ambush?

* Analyzing the markets with Richie Naso, a Wall Street veteran of over 40 years and former member of the NYSE.

DJIA 52-wk: +4.39% | YTD: -3.04% | Wkly: -0.16%

S&P 500 52-wk: +8.37% | YTD: -3.77% | Wkly: -0.47%

NASDAQ 52-wk: +9.72% | YTD: -7.16% | Wkly: -0.27%

Invesco S&P 500 High Beta ETF: 52-wk: -0.18% | YTD: -6.15% | Wkly: +1.41%

• Trade Policy Developments: Markets found temporary relief as President Trump proposed reducing tariffs on Chinese imports from 145% to 80%, signaling a softer stance ahead of U.S.-China trade talks. A new limited trade deal between the U.S. and the U.K. also contributed to improved investor sentiment. ​The Times+1WSJ+1
• Economic Indicators: The April jobs report showed an addition of 177,000 jobs, with the unemployment rate holding steady at 4.2%, indicating a resilient labor market. However, Q1 GDP contracted by 0.3%, marking the first decline in three years, primarily due to a surge in imports ahead of anticipated tariffs. ​Gallagher
• Federal Reserve Stance: The Fed maintained interest rates but warned that tariffs could lead to higher inflation and unemployment. The 10-year Treasury yield remained steady at 4.374%, reflecting expectations that rate cuts might be delayed. ​WSJ

Technology and Renewable Energy: These sectors outperformed, with companies like Tesla and First Solar each gaining around 5% for the week. ​WSJ

Notable Stock Movements:

• Insulet (PODD): Shares surged 20% following strong earnings and an improved full-year revenue forecast.
• Microchip Technology (MCHP): Climbed 12.6% after analysts raised price targets, despite a 27% year-over-year decline in Q4 sales.
• Akamai Technologies (AKAM): Fell over 10% after a price target cut by Scotiabank.
• Expedia Group (EXPE): Dropped nearly 8% following disappointing Q1 results and subdued U.S. travel demand.
• TKO Group Holdings (TKO): Declined 5.5% despite raising its full-year revenue forecast, as earnings missed expectations. ​Investopedia

• FTSE 100 (UK): Closed the week down 0.5%, its worst performance since early April, despite a small daily gain.
• FTSE 250 (UK): Performed better, rising 1.8% over the week.
• Germany's DAX: Reached a record high with a 0.6% daily gain. ​Investopedia+2The Times+2WSJ+2

Nvidia and other semiconductor stocks were rising Thursday as the Trump administration said it plans to scrap regulations that would limit exports of artificial-intelligence chips worldwide.

Nvidia shares were down 0.3% at $116.71 in Thursday morning trading, after gaining more than 3% the previous day. Advanced Micro Devices stock was gaining 2.6%, and Broadcom stock was rising 0.4%.

Chipmakers were rising after the Commerce Department said Wednesday afternoon that it doesn’t intend to implement AI processor restrictions drawn up under the Biden administration, The Wall Street Journal reported. The curbs were set to go into effect on May 15 and would have limited sales more widely than existing sanctions on exports to China.

The so-called “AI diffusion” rules were expected to reduce the long-term market for AI chips by as much as 10%, according to analysts at Bank of America Securities.

“We welcome the administration’s leadership and new direction on AI policy. With the AI Diffusion Rule revoked, America will have a once-in-a-generation opportunity to lead the next industrial revolution,” Nvidia said in an emailed statement.

However, it isn’t clear if the overhaul will lead to alternative rules on chip exports, which could potentially be even more onerous. The White House has considered including AI processor limits as part of bilateral agreements with individual countries, according to the report.

More information could come with President Donald Trump’s planned visit to the Middle East next week, where AI chip exports are likely to be on the agenda.

“We generally expect that Trump will increase the total of chips allowed to be sold globally, starting with Saudi Arabia and the United Arab Emirates, but this could also come with more enforcement to prevent the diversion of banned chips to China,” wrote Raymond James analyst Ed Mills in a research note.

This past week was a big win for the Google bears, but we’re sticking with our bullish bet on Alphabet GOOGL (-0.99%) stock. The company’s shares have dropped 5.9% this week after Apple‘s AAPL (+0.53%) senior vice president of services, Eddy Cue, said Google Search volumes on its Safari browsers declined in April for the first time in court testimony Wednesday. He cited the rise of artificial-intelligence chatbots, including Perplexity, Anthropic, and, of course, ChatGPT, for the slowdown. While he was at it, he also suggested that people might not need an iPhone in 10 years.

For the skeptics, Cue’s testimony would seem to confirm the main crux of their argument: Google’s dominance of search, which accounts for more than half of Alphabet’s revenue, is being eroded by AI, and there’s not much the company can do about it. “Take a cue from Eddy,” writes Melius analyst Ben Reitzes, who previously argued that Alphabet could become the new Kodak. “Just trust your eyes and ears, people are going to ChatGPT (and others) for search-equivalent queries more and more.”

The burden of proof now rests on Alphabet, and the company immediately took issue with the testimony and the conclusions drawn from it. It said that the number of search queries was still growing, and that users are “accessing it for new things and in new ways.” Some evidence suggests the company does have a point. Evercore ISI analyst Mark Mahaney notes that while search growth has slowed, search revenue has grown between 11% and 15% for the past seven quarters. “Reports of search’s death would seem greatly exaggerated,” he writes.

Still, there’s little doubt that Google Search is being disrupted—it’s a question of extent and timing. When Barron’s made its bullish call in November, we argued that the company would be able to survive both disruption to its search business and government lawsuits, which have been harsher than we expected. Google has even disrupted its own search business with AI Overview—the AI-generated summaries that now have more than 1.5 billion users a month, according to the company—and Gemini, which has 350 million users.

That’s not great news—users see ads on an AI Overview just 5% of the time versus 20% for traditional search, says New Street Research analyst Dan Salmon. But the company is exploring new ways of generating revenue from AI, including by putting ads in Google Lens, which uses AI to provide information about what’s in a photo. This past Tuesday, it announced AI Max, a service that uses artificial intelligence to get the right message in front of customers at the right time.

“AI Max does not change the user/behavior competition calculus much today, but it has big implications for how Alphabet can monetize the queries it captures, and that ultimately could impact user experience,” Salmon explains. Google should get a chance to show off these tools and more at its O/I conference on May 20-21.

Alphabet is also far more than search. YouTube, combined with Google One, has 270 million subscribers and would likely be rising if it were a stand-alone stock given Netflix’s 29% gain since the Nasdaq Composite’s February peak. What’s more, Waymo, Alphabet’s self-driving car company, went from completing 150,000 paid driverless cab rides a week late last year to 250,000 rides by April. Both have the potential to provide a big revenue boost in the years to come.

Alphabet shares, at 16.8 times 12-month forward earnings, are now even cheaper than the 18.6 times when we made our pick, and still below its Big Tech competitors— Amazon.com, Apple, Meta Platforms, Microsoft MSFT (+0.13%), and Nvidia NVDA (-0.61%) —which trade for 28 times on average, and the S&P 500 SPX (-0.07%), which fetches closer to 21 times. It’s easy to fall in love when a cheap stock gets cheaper, but it also raises the question of whether it has become a “value trap.”

The Stock Market Got What It Wanted From Trump. Why It’s Finishing the Week Lower.

The stock market rally is winding down as cracks in its momentum begin to show. Caution is the best course of action.

The market should have had a good week. On Thursday, President Donald Trump agreed to a trade deal with the United Kingdom, while Treasury Secretary Scott Bessent was set to meet with Chinese officials on Saturday to discuss tariffs. What’s more, the Federal Reserve, while keeping interest rates unchanged this week, did nothing to suggest that it won’t be able to cut rates later this year, if it so chooses. The combination should have provided a boost of optimism for stocks.

Instead, the market reaction was underwhelming. The Dow Jones Industrial Average DJIA (-0.29%) was down 0.3% for the week, while the S&P 500 SPX(-0.07%) and the Nasdaq Composite COMP (0.00%) were falling 0.5%. More concerning, the S&P 500, at 5660, stalled at resistance near 5700 after having gained 14% from the 4982 low point of its April swoon. The lack of a response suggests that much of the good news is already reflected in the stock market.

Good news is certainly reflected in the S&P 500’s valuation. The index trades at 20.6 times based on analyst estimates for earnings over the next 12 months, near the higher end of its three-year range and in the 86th percentile historically, according to Citigroup data. While valuation isn’t a timing tool, high multiples usually precede lower returns for the index. The high valuations also reflect the market’s confidence in analysts’ S&P 500 earnings estimates of $264 in 2025.

That confidence could be tested in the months ahead. Investors want trade deals, but the state of negotiations remains fragile. Trump is known for contradictory policy announcements, and even the success of negotiations with the U.K.—which had a trade deficit with the U.S.—might not serve as a model for deals still to come. And while the fact that the U.S. and China are set to talk is good news, the outcome is far from determined.

“We know there is a meeting (the known), we just don’t know what will come of it (the unknown),” writes Jonathan Krinsky, chief market technician at BTIG, who warns of “a very poor near-term risk/reward” for stocks.

1. Tuesday: CPI, which is usually an extremely volatile session. Don’t overtrade today.
2. Thursday: Retail sales data. WMT earnings.
3. University of Michigan consumer sentiment.
   

The stock market is looking a little tired to me at these levels. Almost all pertinent sectors are at or close to resistance levels. I would rather buy on strength than to buy here. Proceed with caution.

— Richie Naso

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