After a rotation that would impress the gymnasts in Paris, what’s next for the market? 

Investors have spent recent weeks largely fleeing Big Tech, who have a lot going on this week. On Tuesday, Microsoft will hold its next quarterly earnings call, followed by Meta on Wednesday and Amazon and Apple on Thursday. Wall Street is dying for any hint that heavy investment in artificial intelligence is paying off.

Earn Notice

The so-called Magnificent Seven — the aforementioned four tech firms, plus Alphabet, Nvidia and Tesla — nearly single-handedly powered a bull market in the early months of 2024, at one point accounting for nearly 80% of all market gains. A little top-heavy, no? By the end of February, Apollo chief economist Torsten Slok called the AI bubble “bigger than the 1990s tech bubble,” a bold declaration that just so happened to coincide with Silicon Valley’s executive and insider class initiating a broad selloff of shares.

Now everyone else is catching up. After briefly surpassing Microsoft and Apple by market cap, Nvidia has seen its share price fall roughly 17% since a June peak. Meanwhile, Google-parent Alphabet failed to quell fears when it reported last week; AI spending ballooned to $2.2 billion in the quarter, with little guidance on if or when it would begin making a return. Meanwhile, Meta hasn’t given much indication that its own state of play looks all that different. Also last week, the Facebook owner announced it was taking a — cue the 2001: A Space Odyssey soundtrack — potentially long, long, long view on AI, opting for an open-source free-for-use approach, while also yadda yadda’ing the billions its sunk into development. An overall rapid rotation out of Big Tech has now dragged the Nasdaq 100 Index down 8% in about the past two weeks.

Some of that money has thus far flooded elsewhere — and may continue to flood elsewhere, pending this week’s results. Though, so far at least, not every corner of the non-tech economy has scored equal love from Wall Street:

• Since July 10, industrials in the S&P 500 are up 3.5% while the KBW Regional Banking Index is up over 18%. Consumer staples, meanwhile, haven’t quite gotten a boost; the S&P 500 consumer staples sub-index is up just 1.5%.
• The rotation to other sectors is likely to continue in the coming years. According to recent Goldman Sachs data, Big Tech firms saw annual earnings-per-share growth of 57% in 2023 compared to an S&P 500 Median annual EPS growth of just 4%; by 2026, Goldman projects the gap will narrow to 13% and 9%, respectively.

Fed Up: Supercharging all this, of course, is both another jobs report from the Bureau of Labor Statistics and another Fed meeting that may finally bring about the Godot investors have been waiting for: an interest rate cut. Buckle up. It’s going to be a big, big week.

Science could sink the deep-sea mining industry.

Last week, a study hit the headlines after scientists found evidence that lumps of precious metal on the deep ocean floor produce oxygen, essentially by acting like batteries fizzing in the saltwater. It was a surprising discovery and a dismaying result for the company that actually funded the research, a firm called The Metals Company (TMC) which is heavily invested in deep-sea mining.

Electric Blue Planet

Industrial deep-sea mining hasn’t really materialized yet, and it’s a source of diplomatic tension. There are potato-sized metallic nodules on the deep-sea floor that contain metals like cobalt and nickel that are great for building batteries — which makes them incredibly valuable to sectors that rely on batteries, like the electric vehicle industry. Some companies and countries are in favor of harvesting those nodules, but other countries have pushed back, saying we don’t yet know what kind of ecological damage it could do.

The results of the recent study add more ammunition to the idea that disturbing the sea floor could do serious damage — life in the sea needs oxygen, just like us landlubbers. TMC, an active proponent of deep-sea mining, funded the research but has publicly disavowed the study: 

• TMC said the study’s methodology was flawed, saying some of the results were contaminated, and that other studies had found oxygen levels decreasing at similar sites on the seafloor. 
• TMC also said the study had been rejected by some scientific journals before being published in Nature, which it accused of taking a “strong view against deep-sea mineral sourcing.” As evidence, TMC provided a hyperlink to a Google search for “Nature journal deep-sea mining.”

Dr. Helen Czerski, a physicist and oceanographer at University College London, told The Daily Upside that the study was “robust”, but is limited insofar as we don’t know how consistently the nodules might be producing oxygen. “It’s not clear, basically, how much of this happens and when and in what conditions,” she said, but added: “it seems clear that this deep oxygen is formed in significant quantities when it happens.”

Read This in David Attenborough’s Voice: Czerski said the paper’s findings are an example of just how unknown the deep ocean remains to science. “There are processes in the deep ocean that we didn’t know about. And we should be cautious,” she said. 

The insurance industry isn’t weathering climate change so well. 

The US homeowners insurance segment took a $15.2 billion net underwriting loss last year, the worst loss this century and more than double 2022’s loss, according to a report by ratings agency AM Best.

Premium Cuts

It’s no secret that extreme climate events are getting more and more frequent. According to the federal NOAA National Centers for Environmental Information, there were 28 weather and climate disasters in the United States in 2023, which broke the previous record of 22 in 2020 and left $92.9 billion in damages. At risk of hurricanes are southeastern states like Florida and at risk of wildfires are western states like California.

It’s also no secret that many reasonable people think living in a warm, year-round sunshine climate is better than wearing layers of L.L. Bean to shovel your New England driveway for three months of every year. US population growth confirms as much, but also underscores the stress being put on home insurers:

• “The US population overall grew 7.4% between 2010-2020 but rose 10.2% in the South and 9.2% in the West during the period,” said David Blades, AM Best’s associate director of Industry Research and Analytics. “Population trends show residents increasingly moving toward regions that are more prone to hurricanes, severe convective storms or even wildfires.”
• The so-called combined ratio of insurers writing homeowner’s insurance in New England from 2013 to 2023 was 79.3, while in the South Atlantic and Southern regions, which include the Gulf Coast states, it was 92. The break-even threshold of this ratio is 100 — going over means insurers are paying more money in claims than they are receiving from premiums — and last year 17 states went over.

Florexit: Many firms have given up. According to the National Association of State Credit Union Providers, Florida lost over 30 insurance providers from 2020 to 2023 due to insolvency, changes to their risk appetite, or quitting the state. Insurers have fled California, too, while big names like State Farm, Farmers, and Allstate have cut back on issuing new policies.