(Bloomberg) -- After US technology shares endured their worst drop since late 2022, pummeling the broader market, the trading desk of JPMorgan Chase & Co. is predicting the downdraft will be short-lived.
The slide across chipmakers on Wednesday that dragged the Nasdaq 100 Stock Index down 2.9%, its biggest decline in 19 months, was a “massive overreaction” spurred by geopolitical fears, according to Andrew Tyler, the bank’s head of US Market Intelligence.
“That is taking the market lower but think that rebounds over the next 1-2 weeks,” he wrote in a client note early Thursday, responding to questions he said he’s received about whether the bull run is over and a correction is beginning.
Chipmakers extended losses after the Philadelphia Semiconductor Index logged its biggest one-day drop since October 2022 amid a growing risk of tougher trade restrictions on chip companies and an ongoing rotation away from larger-cap names.
Tyler indicated that his tactical bull case remains aligned with the current backdrop. Among reasons that support a quick recovery in US equities is macroeconomic data continuing to print “Goldilockishly,” he said, viewing the latest retail sales and industrial production reports as “bullish inflection points.” Positive earnings catalysts, with expectations for so-called Magnificent Seven stocks pointing to another “monster quarter,” will also bode well for the US stocks, alongside the view that Federal Reserve officials are still on track to reduce interest rates.
Meanwhile, the recent rotation into small-cap stocks has legs, signaled by the energy and financial sectors closing up during Wednesday’s selloff and the Russell 2000 Index outperforming the S&P 500 Index on the market’s move lower. Small caps have soared recently at a pace not seen since the pandemic as traders moved up their expectations for policy easing.
Risks to his view include seasonal weakness. Since 2000, the S&P 500 had an average return of 1.5% in July. Even after Wednesday’s selling, the benchmark is still up more than 2% month-to-date, which suggests it could give way to a flat August. Elevated positioning across tech shares and slower retail flows late summer are also potential downsides, along with election uncertainty and, particularly, the impact of tariffs.
An earnings miss from the big-tech cohort could be the catalyst to put the breaks on the artificial intelligence trade, he said, after all members of the group have been consistently beat analyst expectations in recent quarters.
So far, “earnings season continues to illustrate that the consumer is doing better than the market is giving credit for,” a strength that is likely to support the economy and, subsequently, earnings and the market, Tyler and his team said.
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