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U.S. stocks took a significant hit on Wednesday, with the Nasdaq Composite dropping by an eyewatering 3.6%. Disappointing earnings reports from major tech companies triggered a $1 trillion rout in the Nasdaq 100 Index. Investors are now facing the pressing question: How long will it take for these massive investments by hyperscalers to start delivering over-the-top results? Patience is becoming the new flag bearer for recent tech stockholders as they wait for these tech bets to pay off.

The Nasdaq index plunged over 3%, marking its roughest day since October 2022. The list of underperformers reads like a roster of A.I. tech’s dream team, with semiconductor heavyweights like Nvidia Corp.(NVDA), Broadcom Inc.(AVGO), and Arm Holdings Plc (ARM) leading the charge downward.

Smaller companies, often the all-stars in a low-rate environment, still show their moxy. On Wednesday, small-cap stocks outperformed their larger counterparts for the fourth consecutive session as the broader rotation tools on

As the tech sector continues its dramatic shift, Wednesday’s market moves hint at more than a routine rotation. Investors are tuning in to increasing Wall Street whispers suggesting that the AI-driven rally, which inflated the S&P 500 by $9 trillion over the past year, might be on the brink of deflating. While Wednesday may not signal the start of this bubble burst, the sharp drop certainly raises a few eyebrows.

Investors are questioning whether the AI-fueled joyride is hitting a few more potholes than anticipated.

The prevailing sentiment is that investors are growing increasingly wary of the colossal spending by U.S. tech giants on artificial intelligence. The "hyperscalers"—Amazon (AMZN), Meta (META), Microsoft (MSFT), and Alphabet (GOOGL)—have splurged around $357 billion on capital investments and R&D over the past year. This hefty expenditure looms large on their balance sheets, necessitating substantial future revenues to validate these massive outlays.

While this spending might not affect earnings immediately, there's an inevitable moment when these giants must prove that their AI investments will lead to significant revenue and profit growth, not just meet analysts' expectations. The pressure is mounting.

The latest market swoon can be traced back to a straightforward issue: meeting—or missing—profit expectations. In a landscape where lofty growth targets are already factored into index prices, merely hitting analyst targets won’t suffice. Companies need to deliver solid earnings and exceptional guidance to drive higher indexes. Otherwise, we might be setting up for a repeat of 2022, and while many are still dancing, there’s a growing sense that investors don’t want to be the last ones on the floor when the A.I. music stops.

In mid-July, we began to see some worrying cracks in cross-asset correlations, though we couldn’t pinpoint why stocks weren’t diving yet. Even so, we advised pulling back from U.S. winners as we grew increasingly concerned about a potential market pullback. While robust economic data and earnings supported the S&P 500’s seemingly steady rally, much was brewing beneath the surface. The surging gold prices were particularly alarming, hinting at an underlying unease.

Canny investors already knew that central bank policy shifts and unpredictable election outcomes could add layers of uncertainty in the latter half of 2024. Despite gold’s recent retreat, the earlier rally had gotten ahead of itself, coming on too strong and too soon. It’s a reminder that while the gold fever may have cooled, the broader market’s challenges are far from over.

After taking profits on speculative paper gold last week (we maintain a steady position in physical gold with our regular monthly purchases), we’ve shifted our strategy to long U.S. cash for the carry and long JPY( negative carry). As you may know from my previous market commentary, going long JPY is a classic reversion trade for us into all BoJ meetings, particularly with current market dynamics favouring massive short JPY due to the surge in carry trades within a low-volatility environment.

Although we scaled back our JPY longs last night, thinking a breach of the 153-level test could be tricky, there’s still potential for further JPY strength if the BoJ caves to political pressure and enacts a hawkish rate hike along with a more considerable reduction in daily bond purchases.

Considering everything, buying JPY on any weakness as a hedge against broader asset market sell-offs or a hawkish BoJ could pay off in spades. The Yen will emerge as a strong performer in a de-risking/ deleveraging environment as systematic selling engines start revving. As per our week ahead commentary, we might only be 100 points on the S&P 500 above that tipping point at 5325

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