(Bloomberg) -- Stocks fell at the end of a wild week, with results from technology giants set to arrive at a critical moment on Wall Street.
Most groups in the S&P 500 dropped Friday, with the gauge having its worst week since April. That’s after a “rotation” that saw investors trimming positions on this year’s winners in favor of laggards. Underpinning that trade were bets the 2024 rally would broaden out of megacaps as the Federal Reserve cuts rates. The swift repositioning spurred calls for a pullback that engulfed various sectors alongside tech ahead of the industry’s earnings.
“Next week is important for the near-term trajectory of the stock earnings, with many megacap tech companies reporting,” said Glen Smith at GDS Wealth Management. “If we were to see the powerful combination of strong tech earnings and softening inflation, that could reverse the market’s recent weakness and spark a new leg higher.”
After the selloff, the “Magnificent Seven” cohort of megacaps ended the week with a 5% slide. Within the overall tech space, losses have been more pronounced in chipmakers. A closed watched gauge of semiconductors like Nvidia Corp. and Intel Corp. sank almost 9%. Even as investors cooled down on the rotation trade, small caps climbed over 1.5% in the span.
The S&P 500 dropped to around 5,500 Friday. The Nasdaq 100 slid about 1%. The Russell 2000 Index of smaller firms fell 0.6%. Behind a massive IT failure that grounded flights and disrupted corporations around the world was cybersecurity company CrowdStrike Holdings Inc. Its stock tumbled as much as 15% before paring losses.
Aside from a slew of earnings next week, traders will be looking at key economic reports including the Fed’s preferred price gauge, which is expected to keep bets alive on a September rate cut. Still, Treasury yields edged up across the curve Friday.
“Economic data has softened and this supports the case for easier monetary policy to come,” said Cayla Seder at State Street. “While lower rates are a good thing for small caps who are hurt more by higher rates, we aren’t convinced this signals a major turning point yet.”
George Cipolloni at Penn Mutual Asset Management says part of the recent rotation was due to money flowing from an overly concentrated market and into unloved, undervalued sectors.
“I do believe that overly concentrated markets can be a precursor for a more volatile market,” he said. “It only takes one big earnings miss or one negative headline from a highly weighted company to take the major indexes down.”
Tesla Inc. and Alphabet Inc. will be the first of the “Magnificent Seven” to report earnings on Tuesday. Analysts will likely press Elon Musk’s electric-vehicle giant on the progress of its plans for robotaxis. And investors will delve into the details of Google’s parent revenue boost from artificial intelligence.
After that, traders will have to wait until the following week — when Microsoft Corp., Meta Platforms Inc., Amazon.com Inc. and Apple Inc. report. Earnings from Nvidia will only come out in late August.
“For the first time since 2022, S&P 500 earnings may not be laser-focused on just technology,” Bloomberg Intelligence strategists led by Gina Martin Adams wrote this month. “While forecasts for the Magnificent Seven remain robust, their earnings are expected to slow in the second quarter — just as the rest of the S&P 500 may finally post their first year-on-year growth in at least five quarters.”
There’s a risk of a setback for the equities this summer, according to Goldman Sachs Group Inc. strategists, who say the market is more more likely to see a correction than a bear market in the second half.
That could result from “the combination of weaker growth data, already more dovish central bank expectations and rising policy uncertainty into the US elections,” strategists led by Christian Mueller-Glissmann wrote.
Investors have flocked to US equities as they grew more certain the Fed will cut rates by September and Donald Trump will win the US presidential election, according to Bank of America Corp. strategists.
US equity funds absorbed about $45 billion — the fourth-largest inflow on record — in the week through Wednesday, a team led by Michael Hartnett wrote in a note, citing EPFR Global data. Small-cap funds had $9.9 billion of inflows, the second-largest ever, while large-cap funds received $27.4 billion.
Hartnett also said it’s likely stocks will slide after the Fed rate cut, calling it a “buy rumor, sell fact” opportunity. His team is also bullish on bonds as he expects any new tariffs enacted by Trump over the next 12 months to be “deflationary than inflationary.”
After spending two months unloading the best-performing stocks in the market, hedge funds are now underweight technology, media and telecom by the most on record.
Their net leverage, which is often viewed as a barometer of risk appetite, fell to 54% in early July, the lowest level since January, according to Goldman Sachs Group Inc.’s prime brokerage desk.
This, however, is not a bearish trade. Rather, the so-called smart money is gearing up for a wild presidential campaign, and the funds want cash ready to be deployed immediately as stock volatility rises and share prices start to swing.
Corporate Highlights:
American Express Co. said it’s planning to increase spending on marketing even as billings growth on the company’s credit cards slowed in the second quarter.
Nippon Steel Corp. has hired former US Secretary of State Mike Pompeo to help complete a proposed purchase of United States Steel Corp., a deal facing bipartisan opposition from Donald Trump and President Joe Biden.
SLB and Halliburton Co. said they see strong international demand for crude drilling after posting earnings that met or beat forecasts, supporting their shift into overseas markets.
SunPower Corp. plunged as Guggenheim Securities cut the solar equipment firm’s price target to zero and said the stock may soon be delisted.
Eli Lilly & Co.’s Mounjaro gained Chinese regulatory approval for weight less than a month after a similar therapy from Novo Nordisk A/S, fueling competition in a nation that’s among the world’s most severely hit by obesity.
Some of the main moves in markets:
Stocks
The S&P 500 fell 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%
Currencies
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 was little changed at 157.50 per dollar
Cryptocurrencies
Bitcoin rose 5.1% to $67,073.76
Ether rose 2.8% to $3,511.22
Bonds
The yield on 10-year Treasuries advanced three basis points to 4.24%
Germany’s 10-year yield advanced four basis points to 2.47%
Britain’s 10-year yield advanced six basis points to 4.12%
Commodities
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 the assistance of Bloomberg Automation.
--With assistance from Sujata Rao, Isabelle Lee, Farah Elbahrawy, Henry Ren, Natalia Kniazhevich, Divya Patil and Richard Henderson.
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