The Calm Before the Big Tech Storm

An interesting and rather ominous day. Today is Tuesday (28/10), and we saw a rather weird rotation out of all the hot sectors in Australia into all the defensive sectors. Interestingly, Goldman Sachs put out a list yesterday of the 12 best defensive stocks in the market – and almost all of them went up today, except for one.

People have been buying boring, defensive stocks like Woolworths (ASX: WOW), Wesfarmers (ASX: WES), Coles (ASX: COL), Telstra (ASX: TLS), and Transurban (ASX: TCL) – all the stocks that get left behind when the market rallies hard.

So, the risk-off stocks. The Australian market seems to be getting a little bit cautious. And you may have seen last night that Michelle Bullock gave a warning. She said people are thinking, well, you know, it could all end up very badly. There are no clear answers, but people are a little bit flummoxed about why credit spreads are so low, why risk premiums are so low, and what it is that makes the markets so comfortable.

In other words, she thinks the market should be feeling uncomfortable. She’s one of a now-growing horde of sensible finger-waggers telling us that the markets are in a bubble at the moment.

We have a huge test this week because there are a few big things coming up – and expectations are already very high. It’s almost a bit of a worry that things have to go really well for the market to stay where it is.

We’ve got the Trump–Xi Jinping meeting on Thursday, and it looks like Scott Bessent has already negotiated a framework involving no rare earths export controls, no 100% tariffs, and Chinese buying soybeans again. That’s all a bit of a love-in. It may well be a trade deal, or it may be a trade truce where they set another date further out to sort other things out. Either way, expectations are high that it’s going to go nicely, with big handshakes and smiles – and the market’s already factoring that in.

The other event is on Thursday at 5 a.m. – the US Federal Reserve meeting. There’s about a 98.6% chance of a rate cut. Another rate cut is expected again – 98% – in December. So, two Fed meetings coming up, and we should get a rate cut this week. Although that’s entirely predictable, it’s always quite positive, so that should drive the markets. But, as I say, the market’s already expecting that too.

There might also be the announcement of the end of quantitative tightening – the process that’s been going on ever since they printed a load of money and stopped issuing as many bonds. That might come to an end, which is a bit like another rate cut as well.

We had an inflation number last Friday that was better than expected, so there’s no reason the Fed shouldn’t stay dovish – plus a rate cut on Thursday. So that’s another positive coming along. We also have a US inflation number on Friday, and judging from the last one, that should be okay.

But the main one – the big one – is Big Tech results. We’ve got Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT), and Meta (NASDAQ: META) all reporting results on Wednesday night (US time). Thursday morning our time, we’ll wake up to those – and again on Friday morning.

That’s the big driver of the market – and the biggest risk, I think – because we all know there’s huge CapEx, and the market’s been running on Big Tech headlines.

Just to point out, the ten biggest tech stocks in the US now make up 40% of the S&P 500. The US markets are 50% of global equity markets – so ten stocks account for 20% of global equity markets. And everyone’s saying they’re in a bubble. So, these results have to be really good. Really, really good – just to be okay. They have to be excellent to be good, but they have to be really good to be okay. And if they’re only okay, or not okay, it could be perilous.

So, we’re going to wake up on Thursday morning to either glory or disaster when it comes to Big Tech results. That’s what we’re all waiting for.

As you probably know, the MT20 portfolio, which has $70 million in it of your money, has cashed out. We’ve decided that everything we do is risk-aware – it’s not about chasing returns. We’ve got out of Big Tech because we think the risks are too high for this week.

We don’t need to have everyone’s money in the market for this moment. We’re happy to avoid it. I’m not sure whether we’re going to see a precipitous moment here, but the mere risk of it means we prefer to step out. Everything we do is risk-aware. It’s become risky – it’s not about the return, it’s not about the trend – it’s become risky.

Everyone from Michelle Bullock to fund managers now are pulling out of the market and writing research questioning Big Tech. There are all sorts of doubts about how they’re funding data centres, and whether earnings will ever justify the CapEx. There are a lot of questions that need answering.

We’ve ducked out ahead of this results season just in case.

If those results are good, the trade deal happens, the Fed cuts rates, and the inflation number is okay this week, we’ll probably continue to go up – and everyone will start talking about a Santa Claus rally.

What we’ll do then, I don’t know – because we’ll need themes that aren’t risky. And almost everything up there at the moment is risky.

Let’s see what happens on Thursday morning, Friday morning. It’s going to be a very interesting week.