The Tech Stock Rally Has Reached a Critical Moment. Watch Tesla, Netflix Earnings.

It’s all the more astonishing when the Federal Reserve’s aggressive rate-hiking campaign is factored in. Higher interest rates typically hurt high-growth tech stocks, given their valuations are linked to future earnings potential.

The Nasdaq is at its highest level since early April last year. Since then, the federal-funds rate has climbed from a range of 0.25% to 0.5% to between 5% and 5.25%. And yet the index is back to its low-rate-era highs.

Another rate hike is expected next week, but the sector appears immune to tightening. Instead, it’s been living in its own world of AI hype. September quarter earnings estimates for the Invesco QQQ exchange-traded fund, which tracks the Nasdaq 100, have only edged higher to $3.26 per share from $3.24 since the end of 2022. Yet the ETF has climbed 44% so far in 2023.

Earnings, which will be kicked off by Tesla and Netflix Wednesday, will be the next big test for the mega-cap tech rally. Investors will be eager to learn whether broader signs of an economic slowdown are beginning to affect tech names.

The sector is unlikely to be completely unaffected by a potential recession, although Goldman Sachs cut the odds of one happening to 20% from 25% Monday.

Treasury Secretary Janet Yellen said Monday she doesn’t expect a U.S. recession but warned of the ripple effects of China’s economic slowdown.

For now, though, earnings season will dictate whether the AI-driven rally has further to run.

—Callum Keown

*** Join Barron’s associate editor for technology Eric Savitz and Ted Mortonson, managing director, technology desk sector strategist at Baird, today at noon when they discuss the outlook for second quarter tech earnings. Sign up here.

Try your hand at this morning’s Barron’s Daily crossword puzzle and sudoku games. For all games, including a digital jigsaw based on the week’s cover story, click here.

***

SEC’s Gensler: Artificial Intelligence Will Disrupt Nearly Everything

Securities and Exchange Commission Chairman Gary Gensler said the agency is preparing for the proliferation of artificial intelligence, which he said will disrupt nearly everything. Potential effects on the stability of the financial system may require a regulatory overhaul, he told the National Press Club on Monday.

• AI is already being used in finance to run call centers, to open accounts, run compliance programs, and trade algorithms, he said in prepared remarks. It has also helped fuel the wealth management industry’s use of robo-advisors and brokerage apps.

• But Gensler added AI can also be used for new ways to deceive the public, whether that be influencing election outcomes or new financial fraud. He warned companies not to overstate AI’s capabilities or use it for deceitful ends.

• He also said AI could heighten financial fragility. Current risk management models will have to be updated and may require new thinking on systemwide and policy safeguards. The issue has gained significance with advancement in AI tools, which Gensler called “the most transformative technology of our time.”

• On the flip side, Gensler said the SEC staff could make use of AI for market surveillance, review of disclosures, exams, enforcement, and economic analysis.

What’s Next: Financial advisors and brokerages could face an SEC crackdown on potential conflicts of interest in how they use AI to recommend products to customers. The agency could begin considering new rules on that issue as soon as October.

—Tae Kim and Janet H. Cho

***

AT&T Stock Sinks After Report on Lead on Cables

AT&T
stock sank to lows it hasn’t seen since February 1993 as analysts tried to evaluate any financial liability for the telecom giant after The Wall Street Journal reported about potentially toxic lead covers on old cables. Shares of fellow telecoms
Verizon Communications
and
Frontier
were also under pressure.

• New Street Research said AT&T likely has the highest exposure overallto lead-cased copper cables, followed by Verizon and
  Lumen Technologies.
  It estimated that removing the lead could cost the industry nearly $60 billion, including potentially $34 billion for AT&T.

• The Journal reported that more than 2,000 cables covered in toxic lead run across the U.S., and that the lead-covered cables can be found on poles, in soil and water, leaching lead and posing potential health risks to the workers and communities around them.

• AT&T declined to comment. A spokesperson from USTelecom, responding on behalf of the telecom industry, said that many factors go into deciding if legacy lead-sheathed cables should be removed. The industry started phasing out lead-sheathed cables 73 years ago.

• Citigroup analyst Michael Rollins cut his rating on AT&T stock to Neutral from Buy. MoffettNathanson’s Craig Moffett kept his Neutral equivalent rating but said investors could steer clear of the stock for a while. JPMorgan also cut its rating to Neutral from Overweight.

What’s Next: The issue may take years to resolve and any financial burden might not exclusively fall on the carriers.
Sherwin-Williams,

Conagra Brands,
and
NL Industries
settled a lead paint lawsuit for $305 million after 19 years of litigation.

—Karishma Vanjani and Janet H. Cho

***

Eli Lilly’s Alzheimer’s Drug Shows Promise in Latest Trial

Eli Lilly
said results from a Phase 3 trial of its investigational Alzheimer’s treatment donanemab showed that it significantly slowed cognitive and functional decline in people in the early stages of the disease. Lilly has already submitted the drug for Food and Drug Administration approval.

• If approved, donanemab can provide “clinically meaningful benefits” for Alzheimer’s patients, with the potential for completing their treatment in as soon as six months, said Lilly Neuroscience President Anne White. It would be the second drug that can slow the disease.

• The FDA gave
  Biogen
  full approval earlier this month for its Alzheimer’s drug Leqembi, which it makes with Japan’s
  Eisai.
  Safety issues for Alzheimer’s treatments remain. Lilly said in May that three trial participants died after developing brain swelling or bleeding issues from its Alzheimer’s treatment.

• In other pharmaceutical news,
  BridgeBio Pharma
  shares jumped 76% after positive results from its Phase 3 study of an investigational heart disease drug. It plans to submit a new drug application to the FDA before the end of this year.

• The FDA approved
  Sanofi
  and
  AstraZeneca’s
  drug to protect infants against respiratory syncytial virus, a rare but potentially deadly respiratory virus. Although not a vaccine, the drug named Beyfortis gives infants antibodies to neutralize the virus.

What’s Next: Sanofi plans to make Beyfortus available in time for RSV season, which typically runs from fall through winter. The Centers for Disease Control and Prevention’s advisors have to recommend its use before the drug can be made widely available.

—Janet H. Cho

***

Microsoft Looks to Extend Activision Blizzard Deal Deadline

Microsoft is seeking to extend the agreed deadline for its $69 billion acquisition of videogame maker Activision Blizzard, according to a report. The two companies are in the final stages of closing and Microsoft looks keen to avoid any possible disruption at the last minute.

• Microsoft wants to extend the acquisition contract with Activision, Reuters reported, citing a person familiar with the matter. The contract is due to expire on Tuesday and its expiration would give either company the right to walk away from the deal.

• The extension isn’t likely to disrupt the deal, with the companies working together to remove the last obstacles to closing. Microsoft and Activision Blizzard didn’t immediately respond to a request for comment from Barron’s early on Tuesday.

• Over the weekend, Microsoft said it signed a binding agreement to keep the Call of Duty franchise on Sony’s PlayStation consoles following the acquisition of Activision, pacifying the biggest opponent of the deal in the videogame industry.

What’s Next: The U.K.’s Competition and Markets Authority is the last major regulator that could still block the deal, after initially rejecting it over concerns about the effects on cloud gaming. The CMA has pushed the deadline for its final decision to Aug. 29 as it considers a submission from Microsoft.

—Adam Clark

***

Hollywood Contracts Could Be Costly for Entertainment Giants

Entertainment companies face the potential for $450 million to $600 million more in annual costs after eventually reaching agreements with the unions representing Hollywood directors, actors, and writers, according to an analysis by Moody’s Investors Service. The actors and writers are currently on strike.

• Neil Begley, a Moody’s senior vice president, made the estimate, factoring in the already ratified agreement with the Directors Guild of America agreement, plus potential new three-year contracts with the Writers Guild and the Screen Actors Guild.

• Studios are under pressure to balance the growth of streaming platforms with the decline in old-fashioned, or linear, television. Two unions being on strike highlights the stresses on both sides of the bargaining table, Moody’s said.

• Movie theater operators such as
  AMC Entertainment
  and
  Cineworld
  are most at risk from a prolonged strike, which has ground production to a halt. Media companies transitioning to streaming from linear TV are also at risk, including
  Walt Disney,

  Paramount Global,
  and
  Warner Bros. Discovery,
  the report said.

• Global streaming firms with little exposure to linear TV and with big content libraries are less at risk, including
  Netflix,

  Apple,
  and
  Amazon.
  They can also make content abroad, away from the striking unions.

What’s Next: Netflix reports June quarter earnings on Wednesday. It projects revenue of $8.2 billion, up 3.4% from a year ago and subscriber growth about in line with the 1.75 million added in the first quarter. But expectations for subscriber growth are moving higher.

—Connor Smith and Liz Moyer

***

Be sure to join this month’s Barron’s Daily virtual stock exchange challenge and show us your stuff.

Each month, we’ll start a new challenge and invite newsletter readers—you!—to build a portfolio using virtual money and compete against the Barron’s and MarketWatch community.

Everyone will start with the same amount and can trade as often or as little as they choose. We’ll track the leaders and at the end of the challenge the winner whose portfolio has the most value will be announced in The Barron’s Daily newsletter.

Are you ready to compete? Join the challenge and pick your stocks here.

***

—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner