By Logan Gilland, CFP®
Last week I told you it was time to buckle up for a bumpy ride. Since then, we’ve been feeling the turbulence.
The S&P 500 has continued a modest decline, now down close to 2.5% from its recent highs earlier this month and 3% from its all time high. The Nasdaq 100, which is made up mostly of technology stocks, has it worse, down close to 10% from its all time high back in June. And if you look under the hood at individual names, it’s even more drastic. Nvidia (NVDA) is down about 18% from its highs. Applied Materials (AMAT) is down 23%. Micron (MU) is down 34% from where it sat just a month ago. This selling has been ugly, and I don’t think it reverses as quickly or as easily as some of the pullbacks we’ve seen over the past couple of years.
Here’s what’s really changed: in my opinion, the market has shifted its tune on AI and big cap technology. Rewind even a year, and companies like Google, Meta, and Nvidia were being applauded for pouring billions into AI infrastructure. That applause has turned into scrutiny. Last week we got earnings from Alphabet (GOOGL), Google’s parent company, and Tesla (TSLA). On the surface, both looked strong. Tesla posted a solid earnings boost from auto sales, and Google’s cloud business grew sharply. But both stocks got crushed anyway. Tesla fell 14% the day after earnings, and Google dropped 7%.
Why? Because investors zeroed in on one thing: free cash flow, which is simply the cash a company has left over after paying for operations and investments. Both companies are spending so heavily on AI infrastructure, what’s often called capital expenditures or “capex,” that it’s eating deep into that cash flow. For Google, free cash flow actually went negative for the first time since the company went public over twenty years ago. Investors used to see heavy AI spending as a sign of confidence. Now I believe they’re asking a tougher question: when does all this spending actually turn into profit?
This move also spooked the broader market, because if two companies like Tesla and Google – which we viewed as having rock solid balance sheets and enormous cash reserves – are getting punished for their spending, what does that say about the outlook for smaller, less financially secure companies making the same kind of bets? It’s a bit like watching a big, well run restaurant chain start to struggle. It gives you a pretty good idea the mom and pop shops down the street are struggling too.
On top of the AI spending jitters, we’ve also had the back and forth of the Iran conflict to contend with. Over the weekend and into Monday morning, word came that the fighting might be on hold for a while. Oil prices dropped in response, so you’d think stocks would rally. They didn’t. Stocks sold off throughout the day Monday, another rough session for technology, while the S&P 500 finished roughly flat. The market seems far more focused right now on AI spending concerns and this week’s Federal Reserve meeting than on what’s happening overseas.
So what does this mean for your money? Remember that markets move in cycles, and I view this as no different. This could still turn out to be a small pullback that bounces back quickly. But I think the tone has genuinely shifted, and not because of a headline or a geopolitical flashpoint. I believe it’s shifted because investor sentiment is changing toward the exact corner of the market that has led the way for years. If the pattern from last week holds, I’d expect strong earnings this week from Amazon (AMZN), Apple (AAPL), Microsoft (MSFT), and Meta (META), but a selloff anyway over the same capital spending concerns.
Here’s the thing worth holding onto through all of this. Pullbacks and declines like this one are uncomfortable, but they’re also what pave the way for the next round of opportunity. A company like Google isn’t spending billions of dollars and burning through its free cash flow for nothing. They’re betting that this infrastructure pays off in a big way down the road. Declines like this aren’t for the faint of heart, but we have been expecting something like this coming.
History gives us a useful guide here. Back during the dot com era, plenty of companies raised huge sums of money, spent it building out ahead of demand, and simply didn’t survive. Pets.com is the name everyone remembers, but it was hardly alone. Companies like Webvan and eToys burned through hundreds of millions of dollars and were gone within a couple of years. But some companies that looked just as shaky at the time came out the other side stronger than ever. Amazon’s (AMZN) stock fell nearly 90% during that stretch, and plenty of people wrote it off completely. Cisco (CSCO) lost about 80% of its value. I do not expect that drastic of declines at this stage, but the point remains. Both survived because the spending they were doing, unlike the companies that failed, stocks like this were building towards the future and were successful in doing so.
I believe there are Pets.com’s sitting inside today’s AI trade. I also believe there are Amazons and Ciscos in there too. Nobody rings a bell to tell you which is which in the moment, and that’s exactly why patience and discipline matter more right now than reacting to any single down day or week. We’re watching closely, and we’re working to put stored up firepower to work when the right opportunities present themselves. Expect to hear more from me as we go through this together.
Talk again soon,
Logan
Logan Gilland, CFP®, is Director of Wealth Management at Bluespring Wealth’s Lexington office, where he helps clients turn financial goals into practical plans. He also shares straightforward financial guidance through the DIY Money podcast, Savings & Sense radio show, and his weekly newsletter, Logan’s Lens. Outside the office, Logan and his wife, Hannah, enjoy hosting friends and planning their next national park trip.
The views expressed herein, including those of guests not affiliated with Bluespring Wealth, reflect the opinions of the author or speaker as of the date of publication, are not statements of fact, and are subject to change without notice. This communication is provided for informational and educational purposes only, does not constitute investment, tax, or legal advice. Any references to specific securities, products, or services do not constitute a recommendation or endorsement. All forward-looking statements and projections are subject to uncertainty and should not be relied upon as predictions of future results. All investments involve risk, including the possible loss of principal. Past performance of any security, index, strategy, or market is not indicative of future results. Any index performance referenced herein is provided for informational context only; indices are unmanaged, do not incur fees, and are not available for direct investment. Diversification and active management do not guarantee a profit or protect against loss in declining markets. Statistical data attributed to third parties is believed to be from reliable sources but has not been independently verified. Bluespring Wealth complies with the requirements of the SEC’s Marketing Rule with respect to the payment of referral fees or other compensation to promoters.