📈 An unprecedented divergence 📉

We’re experiencing an unprecedented divergence between the S&P 500’s earnings estimates and the performance of the benchmark US stock index, driven by skittishness about the return of oil shipments through the Strait of Hormuz and the long-term ROI for the hundreds of billions in AI capex.

• Over the three months ended March 27, analysts have ratcheted up their projected bottom-line results for the largest US publicly traded companies by 8%. Over the same time, those stocks are down 8%. 

• Stocks have never been down this much when earnings estimates have risen by this much, based on data going back to Q2 1990.

• The closest such episodes to the present environment were in mid-2010 amid fears of a double-dip recession following the financial crisis, and in 2018 following a short-lived blowup in volatility markets.

• In some respects, the current market situation is similar to 2025. The Q1 peak in stocks came when Walmart, a major component in momentum indexes, issued a poor full-year outlook and once high-flying stocks got clobbered. It started as a momentum-centric rather than tariff-centric sell-off.

• This time around, the difference is that many parts of the AI trade (especially the megacaps) didn’t have any momentum coming into this. A theme that investors had already been souring on is continuing to unwind.

The world in which these earnings estimates are realized is incompatible with a long-lived oil disruption that sparks a US economic downturn. Oil price spikes are infamously a drag on other parts of consumers’ spending; accordingly, durables and household personal products are the worst two industry groups in the S&P 500 since the end of February.

The Takeaway

For some time now, investors have been of the view that 2026 earnings don’t really matter for the hyperscalers, and they have more creeping doubts on whether this capex binge will prove worth it in the long run — or whether the most meaningful impact on these companies will be the destruction of their free cash flow generation amid these aggressive build-outs. And Nvidia’s fate has been tied to the perception of its biggest customers lately.

The war started off as a major rotation trade. Three major trades that had been tumbling — software vs. semiconductors, US stocks vs. the rest of world, and the Magnificent 7 vs. S&P 500 equal weight — all enjoyed some nascent reversals in the early days of the war. Of those three, Mag 7 versus equal weight is the only one that’s given up all of that rebound and then some.

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Meta is off to a strong start to the week after being named a new “top pick” of Morgan Stanley’s internet analysts.

• Their case: the social media giant is cheap and commands an ever-increasing amount of eyeballs, which it’ll leverage to make money from its massive AI capex through nascent opportunities like agentic shopping and assistants.

• “META sentiment has troughed due to GenAI ROIC and long-term positioning fears, and more recently macro ad market and regulatory question marks,” wrote analyst Brian Nowak. “In all, META now trades at ~15X our ’27 $36 EPS, 1 standard deviation below the long-term average, which creates a strong buying opportunity, in our view.”

• Reported job cuts would also be “a bullish development” that boosts earnings, he added.

Even so, Nowak trimmed his price target on the stock to $775 from $825, which still represents upside of about 50%.

The Takeaway

The hyperscalers have come under persistent pressure as investors remain reticent to bet that this capex binge will have a happy ending. Per The New York Times, Meta recently delayed the launch of its new model because of performance issues. (That being said, the company’s latest earnings report did show that its ability to use AI tools to grow its top line remains impressive, even if its models aren’t best in class.)

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The scale and speed of Alphabet subsidiary Waymo’s rise is impressive: back in May 2024, Waymo ferried just 50,000 paid passengers, but thanks to a rapid expansion to a total of 10 cities, the company is now doing half a million rides a week. That’s about 50 rides per minute. 

Waymo’s whizbang rise, charted

• 🏒 Hockey: Just a few weeks to go of regular-season hockey, and bubble teams have just a handful of games left to get the points needed to make the postseason. Some teams on the precipice are in pretty good shape — the Bruins have an 82% chance* of making the playoffs, the Islanders 71%, and Pittsburgh 67% — but it’s far from a sure thing for plenty of other teams. The Ottawa Senators have just a 52% chance of making the playoffs, the Blue Jackets 49%, the Kings 39%, and the Red Wings 38%. 

• ⛳ The Masters: The Masters kicks off April 9, and with just a week to go, the market’s been tightening up over who’s going home with that green jacket. Scottie Scheffler currently leads with a market-implied 16% chance of winning, but that’s down from as high as 27% back in February. It’s also only narrowly ahead of his closest competition, including Bryson DeChambeau (8%), Jon Rahm (8%), and Rory McIlroy (7%).

*Event contracts are offered through Robinhood Derivatives, LLC — probabilities referenced or sourced from KalshiEx LLC or ForecastEx LLC.

• Earnings expected from Nike, McCormick, Beyond Meat, and FactSet

• February Job Openings and Labor Turnover Survey (JOLTS)

• March consumer confidence