(Bloomberg) — Stocks fell at the end of a tumultuous week as technology giants loomed over earnings reports at a crucial moment for Wall Street.
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Most stocks in the S&P 500 Index fell on Friday, giving the index its worst week since April. This comes after investors “rotated” to trim positions in this year’s gainers in favor of laggards. The trade was fueled by the belief that the 2024 bull market will spread from large-cap stocks as the Federal Reserve cuts interest rates. The rapid repositioning helped fuel the selloff, with various sectors including the technology sector dragged down ahead of industry earnings reports.
“Next week will be important for the near-term trajectory of stock earnings, with many of the big tech companies reporting earnings,” said Glenn Smith of GDS Wealth Management. “If we see a powerful combination of strong tech earnings and softening inflation, it could reverse the market’s recent weakness and spark a new upswing.”
The “Magnificent Seven” large-cap stocks ended the week down 5% after the selling pressure intensified. Across the tech sector, chipmakers were the bigger losers. The Closed Watch Index of semiconductor companies, which includes Nvidia and Intel, fell nearly 9%. While investors took the rotation trade in stride, small caps rose more than 1.5% for the period.
The S&P 500 fell to about 5,500 on Friday. The Nasdaq 100 fell about 1%. The Russell 2000 index of smaller companies dropped 0.6%.Cybersecurity company CrowdStrike Holdings Inc. was behind a major IT outage that grounded flights and disrupted businesses around the world. The company’s shares fell as much as 15% before paring losses.
Besides a slew of corporate earnings reports next week, traders will be focusing on key economic data, including the Fed’s preferred inflation gauge, which is likely to maintain expectations of a September rate cut. Still, Treasury yields broadly edged higher on Friday.
“Economic data is softening, which supports easier monetary policy going forward,” said Kayla Seder at State Street. “While lower rates are good for small and mid-cap stocks, which are hit harder by rising rates, we don’t think this signals a major turning point yet.”
George Cipollone of Penn Mutual Asset Management said part of the recent rotation is due to money flowing out of overly concentrated markets and into out-of-favor and undervalued sectors.
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“I believe that excessive market concentration can be a harbinger of market instability,” he said. “It only takes one big earnings miss or negative news from a significant company to send a major stock index lower.”
Tesla and Alphabet are the first of the “Magnificent Seven” to report earnings on Tuesday, as analysts press Elon Musk’s electric-car giant on the progress of its robotaxi program, while investors scrutinize details of parent company Google’s revenue growth from artificial intelligence.
Traders will then have to wait until next week when Microsoft Corp., Meta Platforms Inc., Amazon.com Inc. and Apple Inc. report earnings. Nvidia is due to report results in late August.
“For the first time since 2022, S&P 500 earnings may not be solely concentrated in tech,” Bloomberg Intelligence strategists led by Gina Martin Adams wrote this month. “Forecasts for the Magnificent Seven remain strong, but earnings are expected to slow in the second quarter, just as the rest of the S&P 500 may post year-over-year growth for the first time in at least five quarters.”
Stocks risk a pullback this summer and the second half of the year is more likely to be a correction than a bear market, according to strategists at Goldman Sachs Group Inc.
This could result from a combination of “weaker growth data, an already dovish central bank outlook, and heightened policy uncertainty ahead of the U.S. presidential election,” the strategists, led by Christian Mueller-Grissmann, wrote.
Investors are flocking to U.S. stocks as confidence grows that the Federal Reserve will cut interest rates by September and that Donald Trump will win the U.S. presidential election, according to strategists at Bank of America.
Citing data from EPFR Global, a team led by Michael Hartnett reported that U.S. equity funds saw inflows of about $45 billion in the week that ended on Wednesday, the fourth-largest total on record. Small-cap funds saw inflows of $9.9 billion, the second-largest on record, while large-cap funds saw inflows of $27.4 billion.
Hartnett also said stocks will likely fall after the Fed cuts interest rates, calling it a chance to “buy the rumor and sell the fact.” His team is also bullish on bonds, believing any new tariffs imposed by President Trump in the next 12 months will be “more deflationary than inflationary.”
Hedge funds are now at their biggest ever underweight in technology, media and communications stocks after two months of selling off the market’s best-performing stocks.
Banks’ net leverage, seen as a barometer of risk appetite, fell to 54 percent in early July, the lowest level since January, according to Goldman Sachs Group Inc.’s prime brokerage unit.
But this isn’t a bearish trade. Rather, so-called smart money is preparing for a tough presidential election, and funds want cash they can use quickly if stock volatility picks up and stock prices start to fluctuate.
Company Highlights:
American Express Co. said it plans to increase spending on marketing even as growth in its credit card sales slowed in the second quarter.
Nippon Steel Corp. has hired former U.S. Secretary of State Mike Pompeo to help push through its proposed takeover of U.S. Steel Corp., which faces bipartisan opposition from President Donald Trump and Joe Biden.
SLB and Halliburton Co., which posted profits that were in line with or better than expected, said international demand for oil drilling was robust, fuelling a shift to overseas markets.
Shares of solar-power-equipment maker SunPower Inc. plummeted after Guggenheim Securities cut its price target to zero and said the company’s shares may soon be delisted.
Eli Lilly & Co.’s Munjaro was approved by Chinese regulators as a weight-loss treatment less than a month after a similar treatment from Novo Nordisk Inc. was approved, increasing competition in a country where obesity is one of the world’s worst hit.
Some of the key market developments:
stock
The S&P 500 was down 0.7% as of 4 p.m. New York time.
The Nasdaq 100 fell 0.9%.
The Dow Jones Industrial Average fell 0.9%.
The MSCI World Index fell 0.8%.
currency
The Bloomberg Dollar Spot Index rose 0.2%.
The euro fell 0.2% to $1.0880.
The British pound fell 0.3% to $1.2911.
The Japanese yen remained almost unchanged at 157.50 yen to the dollar.
Cryptocurrency
Bitcoin rose 5.1% to $67,073.76.
Ether rose 2.8% to $3,511.22.
Bonds
The yield on the 10-year Treasury note rose 3 basis points to 4.24%.
German 10-year government bond yields rose 4 basis points to 2.47%.
UK 10-year government bond yields rose 6 basis points to 4.12%.
merchandise
West Texas Intermediate crude fell 3.1% to $80.28 a barrel.
Spot gold fell 1.9% to $2,398.73 an ounce.
This story was produced with assistance from Bloomberg Automation.
–With assistance from Sujata Rao, Isabelle Lee, Farah Elbahrawy, Henry Ren, Natalia Kniazhevich, Divya Patil, and Richard Henderson.
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