By David Randall
NEW YORK (Reuters) – Rattling investors are bracing for gains from the market’s biggest tech companies, a Federal Reserve policy meeting and closely watched employment data in a week that could shape the short-term trajectory of U.S. stocks after a period of severe turbulence.
A months-long rally in massive tech stocks hit a wall in the second half of July, culminating in a sell-off that saw the S&P 500 and Nasdaq Composite Index post their biggest one-day losses since 2022 on Wednesday after disappointing gains from Tesla and Google. -parent alphabet.
More volatility could be in store. Next week’s results from Microsoft, Apple, Amazon.com and Facebook parent Meta Platforms could further test investors’ tolerance for potential profit shortfalls from tech titans. The blistering rallies of the world’s biggest tech companies this year have pushed markets higher, but have raised concerns about over-inflated valuations.
While the S&P 500 is still only about 5% below its all-time high and is up nearly 14% this year, some investors worry that Wall Street may have become too optimistic about earnings growth, leaving stocks vulnerable as companies unable to meet expectations. in the next months.
Investors will also be closely watching comments following the end of the Federal Reserve’s monetary policy meeting on Wednesday for clues as to whether officials are poised to implement rate cuts, which market participants widely expect to happen in September to start. Employment data at the end of the week, including the closely watched monthly jobs report, could indicate whether an incipient labor market downturn has become more severe.
“This is a critical time for the markets,” said Bryant VanCronkhite, senior portfolio manager at Allspring. “People are starting to wonder why they’re paying so much for these AI companies, while the market fears the Fed will miss the opportunity to engineer a soft landing, and that’s causing a violent reaction.”
Recent weeks have seen signs of a rotation from high-flying tech leaders to market sectors that have languished for most of the year, including small caps and value stocks such as financials.
The Russell 1000 Value index is up more than 3% over the past month, while the Russell 1000 Growth index is down almost 3%. The small-cap-focused Russell 2000 is up nearly 9% this month, while the S&P 500 has lost more than 1%.
Even strong gains may not be enough to pull the broad market out of its recent slump, at least in the short term, said Keith Lerner, chief market strategist at Truist.
“The market will take a direction based on the fact that these stocks have pulled back,” he said. “I think technology has fallen so much, even if you get a rise in these names because of revenue, people are going to be itching to sell any gains.”
And any signs that the Fed is seeing a worse-than-expected deterioration in the economy could also unnerve investors, disrupting the narrative of cooling inflation but still-resilient growth that has supported markets in recent months.
“We think they’re going to stick to the script that they’re going to be data-dependent, but the data doesn’t flow in a straight line,” said Matt Peron, Global Head of Solutions at Janus Henderson Investors. Conflicting signals in the economy include faster-than-expected GDP growth in the second quarter, alongside declining industrial activity.
Markets are currently pricing in a virtual certainty that the Fed will begin cutting rates at its September meeting, and expect a total rate cut of 66 basis points by the end of the year, according to CME’s FedWatch Tool.
Employment figures at the end of the week could impact those odds if they show the economy slowing faster than expected, or conversely, if a picture of rebounding growth emerges.
Still, the recent sell-off can be seen as a healthy part of a bull market that’s burning off excess dross, said Charles Lemonides, head of hedge fund ValueWorks LLC.
“I think the longer-term story is that growth names will take us through another market somewhere down the road,” he said.
(Reporting by David Randall; Editing by Ira Iosebashvili and Leslie Adler)