The Market Is Puking Back Good News

Meta and Microsoft both posted strong earnings yesterday, easily surpassing expectations. Meta reported EPS and revenue well above analyst forecasts, driven by strong user engagement and advertising growth. Microsoft also delivered better-than-expected results, fueled by robust cloud and AI demand, particularly in Azure.

These earnings helped drive a powerful after market — then early morning rally in tech, with the QQQ reaching as high as $576 shortly after the open today.

However, that strength is fading notably. By midday, the QQQ had sold off sharply, sliding all the way down to a low with a $564 handle. A $12 intraday swing lower represents a significant move of about 2% for the index.

The reversal is even more striking when you consider that QQQ has been on a relentless grind higher over the past month, largely driven by just a handful of mega cap names — led by the same ones that just “beat” earnings handily.

While the ETF touched new highs earlier this week, its gains have been increasingly narrow—market breadth has been awful, as I’ve noted, with most of the advancing concentrated in the same small cluster of stocks that make up the bulk of its weight — again, led by the same ones that just “beat” earnings.

The selloff could be a reflection of stretched valuations, with the market finally showing signs of rejecting the extreme multiples it has been willing to pay.

Valuation remains just as important as earnings beats, and the market has been trading at a absolutely batshit historically elevated Shiller PE ratio near 38x for months. Even with strong fundamental performance, the price investors are willing to pay for each dollar of earnings could be starting to face resistance.

The situation is amplified by the structure of the market itself. The Mag 7—Microsoft, Apple, Amazon, Meta, Alphabet, Tesla, and Nvidia—make up such a massive portion of the S&P 500 that they effectively are the index (or in this case, the NASDAQ).

Passive index flows have concentrated capital into these names, creating a feedback loop where new inflows automatically drive up their prices, regardless of valuation.

But with market breadth so thin, any stall in this passive bid — or enough selling — could cause an outsized impact, as is detailed here:

If inflows slow or reverse, the mechanical buying pressure that has supported these stocks could quickly become a lack of support—and in a market this concentrated, that could translate into sharp downside for the broader indexes. Especially because a lot of the passive funds may not have liquid cash to meet redemptions, they take on leverage to do so. That jig ends after enough people redeem.

Technically, today’s intraday action is nasty. The sharp reversal from highs to deep red could suggest there is little appetite to keep bidding the Mag 7 stocks at their current valuations. The market’s message seems to be: great earnings, but for now, not enough. This is an important dynamic to watch because the Mag 7’s dominance means their price action can dictate the S&P 500’s direction almost entirely.

The next key test comes tonight, when Amazon and Apple report earnings. If either one misses expectations, the market could get crushed. Even if they beat but the QQQ still sells off, it could mark the start of a multiple contraction phase—where earnings growth is no longer enough to justify price levels.

With the market this concentrated, deteriorating breadth, and passive flows potentially stalling, today’s reversal could be an early signal of just how fragile the current rally is.

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