Tech Bears Pounce, But History Says Not So Fast

• A misread OpenAI revenue headline sent tech stocks lower.

• The Nasdaq’s RSI dropped more than 20 points heading into earnings.

• History shows these drops tend to be noise.

Wall Street has a habit of panicking right before it gets the facts…

Tech stocks just hit an air pocket. The Nasdaq Composite Index closed at a new high on October 6. Six sessions later, it's down over 3%. The spark was a headline. On October 8, the Financial Times put OpenAI's annualized revenue at about $50 billion. That's roughly $20 billion below the nearly $70 billion AXIOS reported on September 29. The market heard "shortfall" and sold first.

Here's the problem - there was no shortfall. OpenAI books sales made through cloud partners on a net basis, counting only its cut. Anthropic books them gross, counting the full sale. The $70 billion figure AXIOS reported came from an attempt to gross up OpenAI’s numbers to look more like Anthropic’s. It applied OpenAI’s 70%-plus growth rate to a grossed-up $40 billion base, instead of the roughly $30 billion net figure the company had reported. Run the projections off the right base and you land near $50 billion. The headline number came down, but the growth rate didn't.

Nonetheless, the incorrect assumptions in that story have handed the tech bears fresh fodder to pounce on. Now don't get me wrong, OpenAI could have put this issue to bed weeks ago by correcting the $70 billion figure when it first came out. It didn't, and that silence left the door open. Still, the story is wrong based on the way OpenAI and Anthropic account for their numbers.

Yet this kind of negativity heading into tech earnings is something we've seen before. In fact, it's practically a ritual. We've seen a similar pattern play out in tech stocks 102 times since 1985, or in roughly three out of every five quarters. And quite often, it proves to be noise. Headlines travel faster than ever, and the selling that follows can feel more violent. But the scoreboard hasn't changed. History says stay the course, and that points to a steady rally in the Nasdaq Composite Index.

But don't take my word for it, let's look at what the data's telling us...

What RSI Is Telling Us

Let’s start by taking a look at the Nasdaq Composite’s Relative Strength Index (“RSI”). Think of it as a speedometer for the market. It doesn't tell you where prices are. It tells you how hard and fast they've been moving. The gauge compares the index's average gains to its average losses over the last 14 trading days and puts the result on a scale of 0 to 100. A reading above 70 tells us the market is "overbought," meaning the move has run hot, while a result below 30 indicates the index is "oversold," meaning selling has gotten stretched.

On October 6, when the Nasdaq set a new high, the RSI stood at 67.9. That’s right up against an overbought reading. Yet, by yesterday's close, it dropped to 45.8. That's a 22.1-point collapse in six trading days, landing right between the September 30 quarter-end and the start of tech earnings season.

I went back to 1985 and screened for every time the Nasdaq's RSI fell more than 20 points below its 10-day high within the first 20 trading days after a quarter closed. Counting only the first signal each quarter, that turned up 102 instances, including the most recent one. Then I measured the Nasdaq's return from the close on each signal day.

Based on the data, similar instances in the past have produced solid gains moving forward…

As you can see in the above table, patience, and not trying to time the market, tends to pay off. Six months out, the Nasdaq had an average gain of 6.7%, with a 71% success ratio. At 12 months, the average return roughly doubled to 13.8% with a nearly 78% success rate. And by 24 months, the average gain was slightly better than 27% with a success rate over 82%. In other words, a sharp momentum flush heading into earnings has done nothing to knock the Nasdaq off its long-term path. Investors who sold the scare didn't dodge anything. They just stepped off a train that kept moving.

Bottom Line

Where does that leave the Nasdaq? In a better spot than the headlines suggest. The RSI has been flushed back toward the low end of its range, removing some of the froth and giving the Nasdaq room to run. And the next catalyst is already on the calendar. Tech earnings start in a couple of weeks, when audited numbers replace leaked ones. If AI demand is growing anywhere near 70%, the companies selling the chipmakers, hyperscalers, and software providers will have plenty to say about it.

History has run this playbook 102 times. The bears got a headline out of a math mistake. The bulls have four decades of data. More often than not, the data wins. And it points to a steady rally in the Nasdaq Composite Index.

Five Stories Moving the Market:

Anthropic PBC told prospective investors its third-quarter revenue hit $16.8 billion, as the artificial intelligence company pushes ahead with plans to go public; the firm behind Claude is generating positive free cash flow, had adjusted gross margin of 85% and an over 11% positive adjusted operating margin as of the third quarter – Bloomberg. (Why you should care – Anthropic’s compute margin is said to be greater than 40%)

Federal Reserve Bank of San Francisco President Mary Daly signaled there’s no need to raise interest rates at the upcoming monetary policy meeting; Daly said another increase may be needed to rein-in too high inflation but policymakers will need more time to deliberate – Reuters. (Why you should care – Daly said she’s unsure of the timing on the next rate hike)

Jean-Luc Mélenchon has vowed to cancel hundreds of billions of euros in France’s national debt, prosecute its central-bank governor, nationalize swaths of the economy and pull out of the North Atlantic Treaty Organization – WSJ. (Why you should care – cancelling France’s debt would create significantly higher borrowing costs and runaway inflation)

The International Monetary Fund’s Asia-Pacific Department Chief Krishna Srinivasan said China’s yuan is undervalued in real terms because of the country’s flagging domestic economy, and steps to revive demand have fallen far short of what’s needed – Bloomberg. (Why you should care - China’s tightly managed yuan limits its ability to cushion a slowdown, risking a deeper downturn that could weigh on growth across Asia)

Inflation picked up in September, a sign that high energy prices are tightening their squeeze on consumers ahead of next month’s midterm elections; consumer prices were up 3.7% in September from a year earlier, according to the Labor Department – WSJ. (Why you should care – roughly 2.5 percentage points of headline inflation growth will drop out of the number by next May)

Economic Calendar:

Earnings: SCHW, PLD, BNY, USB, PNC, MRSH, IBKR, JBHT

SNB's Schlegel (Chairman) Speaks (12:30 a.m.)

Japan - Industrial Production for August (Final) (12:30 a.m.)

U.K. - GDP for August (2 a.m.)

U.K. - Industrial Production for August (2 a.m.)

U.K. - Trade Balance for August (2 a.m.)

Switzerland - PPI for September (2:30 a.m.)

France - CPI for September (Final) (2:45 a.m.)

BoE's Breeden (Deputy Governor) Speaks (4:45 a.m.)

BoC's Rogers (Senior Deputy Governor) Speaks (5 a.m.)

Eurozone - Industrial Production for August (5 a.m.)

U.S. - Initial Jobless Claims (8:30 a.m.)

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U.S. - Retail Sales for September (8:30 a.m.)

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U.S. - Business Inventories for August (10 a.m.)

U.S. - Energy Information Administration Crude Oil Inventory Data (12 p.m.)

Fed's Hammack (Cleveland, Voter) Speaks (4:30 p.m.)

Fed's Balance Sheet Update (4:30 p.m.)

Fed's Warsh (Chair) Speaks (11:30 p.m.)