(Bloomberg) -- Wall Street got a reality check after a disappointing start of the megacap earnings season fueled concern the artificial-intelligence frenzy that has powered the bull market might be overblown.
The world’s largest technology companies drove the S&P 500 down 2.3% as the U.S. benchmark suffered its worst selloff since December 2022. Losses were more pronounced in the Nasdaq 100, which tumbled almost 4%. Alphabet Inc. slid 5% after sinking more resources into its drive to outmatch rivals in AI, with spending higher than analysts expected. Tesla Inc.’s profit miss and the Robotaxi delay spurred a 12% stock plunge.
“Investors are finally waking up to all that AI spend and realizing it is much more of an expense right now rather than a revenue generator,” said Peter Boockvar at The Boock Report.
Wednesday’s session was another lesson in the “concentration risk” bears see as latent in a market whose upside has owed disproportionately to a narrow cohort of massive gainers. For a fourth straight session — and the 10th time in 11 days — the performance of smaller companies exceeded larger ones, evidence investor tastes have shifted from the megacap tech names that have come to dominate benchmark indexes.
The Treasury curve steepened on bets the Federal Reserve is close to cutting rates. Former New York Fed President William Dudley called for lower borrowing costs — preferably at next week’s gathering. For many analysts, such a move would be worrisome as it would indicate officials rushing to avoid a recession.
The loonie fell as the Bank of Canada cut rates, focused on “downside risks.” The yen hit the highest since May amid an unwind in carry trades.
To Steve Clayton at Hargreaves Lansdown, this could be the year markets start talking about the “So-So Seven,” noting that results from Tesla and Alphabet are not enough to maintain their momentum.
“The market is not impressed with the start of earnings season for the mega tech stocks,” said Kathleen Brooks, research director at XTB. “There was a lot resting on these results and we don’t think that they give clear answers to questions about the effectiveness and profit potential for AI right now.”
After driving the rally in stocks for most of 2024, big tech slammed into a wall. Traders rotated from megacaps to lagging parts of the market, spurred by bets on Fed rate cuts and concern AI still needs to pay off.
“Tech’s problem isn’t just that earnings are less than perfect, but the group is still caught up in the violent rotation trade that kicked off with the June CPI,” said Vital Knowledge’s Adam Crisafulli. “Many assumed the anti-tech rotation would be ephemeral and the fact it’s proving durable is compounding anxiety toward the group and spurring additional selling pressure.”
The drubbing in these stocks has seen some of the air come out of valuations. While that’s something that could argue in favor of dip buying, the earnings season is just getting started. Apple Inc., Microsoft Corp., Amazon.com Inc. and Meta Platforms Inc. are all due to report results next week.
To Jose Torres at Interactive Brokers, the equity correction is far from over.
Despite recent selling, the S&P 500 is still trading close to 22 times earnings amidst quarterly results that aren’t impressing investors in aggregate. In addition, the benchmark is still up about 15% year to date, which is terrific considering it isn’t even August.
“Yesterday we wrote that a 10% to 15% correction was in the cards this quarter, historically the worst period of the year,” Torres said. “This quarter, the valuation concerns are paired with front-loaded gains, irrational exuberance, a high bar for earnings estimates and a presidential election.”
But as far as quarterly results, the concern is not exclusively related to tech. Broadly, second-quarter earnings season is off to a weaker start than usual.
Among S&P 500 companies that reported results, profits beat analyst estimates by the smallest margin since the end of 2022 — while sales surprises were the worst in at least two years, according to data compiled by Bloomberg.
“We are still looking for volatility to increase moving through the second half of 2024 - with the potential for a 10% to 15% correction in benchmarks like the S&P 500 and the Nasdaq 100,” said Dan Wantrobski at Janney Montgomery Scott. “Our work does not point to secular/structural downturn at this time, but rather a pause in the reflationary expansion cycle that began a few years ago.”
Just as earnings roll in, a key technical indicator in the U.S. stock market sat close to historic extremes — a crucial gauge that has foretold past selloffs.
Known as the “the 200-DMA” — an abbreviation of 200-day moving average — the gauge measures how the S&P 500 is performing against that longer-term measure. At one point last week, the benchmark was trading as much as 15% above it, according to data compiled by Bloomberg.
Although that does not necessarily mean the market is about to tank, it is a warning sign for investors concerned about lofty tech valuations and concentration risk.
The recent slump in U.S. stocks is flashing a warning totrend-following funds: sell U.S. equities no matter which direction the market goes.
Both the Nasdaq 100 and the S&P 500 benchmarks have breached thresholds that trigger a selling signal for commodity trading advisers, or CTAs, according to models at Goldman Sachs Group Inc.’s trading desk.
If stocks keep falling, those rules-based traders could unwind US$32.9 billion of global stocks with $7.9 billion flowing out of the U.S. market, according to an analysis from the bank’s trading desk. Even if the market reverses its slide, CTAs are still poised to sell $902 million of U.S. stocks.
Corporate Highlights:
· Texas Instruments Inc. provided a sales outlook that signals an inventory glut is coming to an end, reassuring investors that a revival is underway in key markets for the company’s chips.
· AT&T Inc.added far more mobile-phone subscribers than Wall Street expected in the second quarter, with fewer customers canceling and many adding wireless service to their broadband plans.
· Visa Inc. reported quarterly revenue that just missed Wall Street estimates — a rarity for the world’s biggest payments network.
· Pfizer Inc.’s gene therapy for a severe bleeding disorder met its goal in a pivotal late-stage trial, paving the way for the company to enter what’s proven to be a challenging market for drug companies.
· Deutsche Bank AG said it will most likely refrain from conducting a second share buyback this year, after suffering its first quarterly loss in four years.
· Kering SA warned that its profit is set to tumble in the second half of the year as luxury demand cools and turnaround efforts at Gucci, its biggest brand, continue to sputter.
· Renault SA reported its highest-ever profitability in the first half as the automaker benefited from lower raw-material prices and robust demand for more expensive sport utility vehicles like the Austral and Espace.
· Blackstone Mortgage Trust Inc., which provides financing for commercial real estate, is cutting its dividend by 24% as defaults increase and borrowers struggle to make payments or refinance their loans.
· CrowdStrike Holdings Inc., the cybersecurity company at the center of massive global IT outages, said that a bug in a safety mechanism allowed flawed data to go out to customers in a botched update, causing last week’s meltdown.
Key events this week:
· Germany IFO business climate, Thursday
· U.S. GDP, initial jobless claims, durable goods, Thursday
· U.S. personal income, PCE, consumer sentiment, Friday
Some of the main moves in markets:
Stocks
· The S&P 500 fell 2.3% as of 4 p.m. New York time
· The Nasdaq 100 fell 3.7%
· The Dow Jones Industrial Average fell 1.2%
· The MSCI World Index fell 1.9%
Currencies
· The Bloomberg Dollar Spot Index was little changed
· The euro fell 0.1% to $1.0839
· The British pound was little changed at $1.2903
· The Japanese yen rose 1% to 153.98 per dollar
Cryptocurrencies
· Bitcoin fell 0.1% to $65,765.13
· Ether fell 3.3% to $3,368.11
Bonds
· The yield on 10-year Treasuries advanced four basis points to 4.29%
· Germany’s 10-year yield was little changed at 2.44%
· Britain’s 10-year yield advanced three basis points to 4.16%
Commodities
· West Texas Intermediate crude rose 0.8% to $77.56 a barrel
· Spot gold fell 0.4% to $2,399.14 an ounce
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