By Peter Wechsler
President & Co-Founder, Franklin Retirement Solutions
[email protected]
I’m writing this on Thursday, from the comfortable confines of… my office. No travel this week, no travel at all this month. July’s been one of the rare months where I’ve stayed home. It’s been a month of beautiful weather and plenty of heat. To that end, I have plenty of shade on my patio and it looks perfect from my air-conditioned living room.
Along with the heat, mid-July is “earnings season”. For a lot of companies, their second quarter ended on June 30th and they’re now starting to report their Q2 and first half earnings. A lot of the early attention is on the so-called Magnificent 7—Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia, and Yul Brenner Tesla. As I write this, only Alphabet and Tesla have reported their earnings, with Alphabet beating estimates and Tesla struggling.
It’s Tesla’s second straight down quarter, and CEO Elon Musk said that the company could experience a few rough quarters. Why? As one analyst explained Tesla’s position, “Competition is fierce, tariffs are biting, the end of tax credits for electric vehicle buyers in the US could hurt, Elon Musk’s political escapades have been a turn-off for many people, and product innovation has failed to make waves.”
Elon Musk’s missteps certainly cost the company customers, but Tesla isn’t the only automaker down for the quarter and they’re not the only company chalking up their troubles, in part or in full, to President Trump’s tariffs. The second quarter started on April 1st and just a day later (a day late?) President Trump announced unilateral tariffs on practically every trading partner on “Liberation Day”. We’re starting to see concrete evidence of their impact. So far this week, American automakers Stellantis (Dodge) reported a first-half net loss of $2.7 billion while GM reported a $1.1 billion loss over the last three months. Hyundai, headquartered in South Korea, reported a second quarter drop-off of $606.5 million. Each company indicated tariffs played a role. Outside of the automotive sector, Keurig Doctor Pepper missed estimates on its coffee business due to tariffs on Central American (aka coffee-growing) countries while toy-maker Mattel adjusted forecasts lower due to “global trade uncertainty”.
With tariffs playing such a big role in earnings reports so far, we have to wonder what their overall impact will be as the reports continue to come in. While all three major indexes are up for July, the Dow is just now returning to where it was in February following the April tariff-related tumble.
Now, back to the rest of the Magnificent 7. Apple, Microsoft, Amazon, Meta, and Nvidia are all heavily invested in (or, in the case of Nvidia—fueling) the AI arms race, and analysts are predicting strong earnings from each. Will they see it? By the time you’re reading this, we’ll have a better idea.
AI is ubiquitous enough now and things are starting to happen that, as investors, you should pay attention to. One: companies are spending a ton of money on AI advancements and are expected to continue investing huge sums for years to come, but they have so far struggled to find a way to make money with their advancements. At some point these companies will have to show a profit to keep investors engaged. Secondly, as more people use AI services the novelty is starting to wear off. As the novelty wears off, the long-term impact and viability of AI and AI products becomes questionable. We’re at the point with the technology that plenty of people like the idea of AI working for them but they don’t want AI used on them. As perceived benefits dwindle and observed drawbacks mount, consumers and investors can both lose interest.
It follows then that some analysts and journalists—most notably within Fortune and Reuters—are already starting to use the B word with AI. “Bubble.”
In an article appearing on Tuesday, Jamie McGeever of Reuters asked, “Is today’s AI boom bigger than the dotcom bubble?” He noted the ways in which the AI boom has mirrored the dotcom boom of the early 00s and, in some cases, surpassed it. He quelled the big fears immediately afterwards, noting that the markets work in a fundamentally different way in the 2020s than they did in the early 00s. But he ended with the comment that, “a meaningful, prolonged market correction cannot be ruled out, especially if AI-driven growth isn’t delivered as quickly as investors expect.” Again, can the promises of AI keep investors engaged long enough to see them to fruition? Who can say?
Markets influenced by tariffs, AI, and uncertainty. What else is new?
If you have any questions, want to take a look at the role technology is playing in your portfolios, or want to adjust how much safe money you have, give us a call and we’ll match up calendars. Rest assured that Kyle, Rob, and I have look at all of this stuff routinely and we adjust when we see a need to.
Enjoy the weekend, as hopefully the rain gives us a break from the heat.
Peter