After six down days in a row on Wall Street, the six-month equity market rally looks shaky. Next week could prove pivotal.
Apr 21, 2024 – 9.00am
After an impressive six-month run, investors are being reminded that equity markets don’t just go up and to the right.
The S&P 500 – the global benchmark for risk – has now fallen for six straight days, and is down 5.5 per cent from its recent all-time high. It remains 18 per cent higher since November, but is now more than halfway to the 10 per cent fall that is traditionally seen as a correction.
Despite the situation in the Middle East seemingly calmer after the dust settled following Israel’s retaliatory attack on Iran, equity markets were reminded that there are plenty of other things to worry about.
Top of the list, of course, is inflation. Though the benchmark 10-year yield on US Treasuries was well-behaved on Friday night, falling 1 basis point to 4.62 per cent, Federal Reserve Bank of Chicago president Austan Goolsbee declared himself a “proud data dog” who isn’t happy with what he’s smelling in America’s recent hot inflation numbers.
“If you are unclear, stop walking and start sniffing,” he said. “And with these numbers, we need to do more sniffing.”
The market is waking up to the fact that there is little in recent US economic data that will allow the Fed to cut if it wants to protect its credibility. As Bank of America strategist Michael Hartnett says, good news for the US economy is suddenly bad news for markets, which are starting to worry the end of higher-for-longer rates is drifting out of sight.
The inflation narrative is well known. The developing story is the sudden cracks appearing in the big tech story.
The magnificent seven tech stocks – Alphabet, Amazon, Nvidia, Microsoft, Tesla, Meta Platforms and Apple – have become the magnificent five recently, with Apple and Tesla stock down year-to-date; Elon Musk’s electric vehicle giant has shed 40 per cent of its value this week. Savage sell-offs
But there are cracks appearing elsewhere, too. Shares in Nvidia lost 10 per cent on Friday, taking its losses since its all-time high in late March to almost 20 per cent. Netflix shares lost more than 9 per cent on Friday, while stock in another much-hyped chipmaker, Super Micro Systems, plunged more than 23 per cent on Friday night in a brutal sell-off.
These savage sell-offs in Nvidia and Super Micro, two chipmakers so closely associated with the artificial intelligence boom, are a little difficult to explain. There has been no obvious news out of these companies that would rattle investors; all Super Micro said on Friday was that it would stop the frankly silly process whereby it pre-announced its quarterly earnings about 10 days before actually delivering them.
But concerns about the broader chip-making sector did build through the week, after the world’s biggest semiconductor company, Taiwan Semiconductor Manufacturing Company, scaled back its outlook for a chip-market expansion and Dutch lithography group ASML posted disappointing orders.
If rate cuts aren’t coming, the market needs the giants to deliver strong March quarter profits.
So while it is important to put the share price drops of Nvidia and Super Micro in context – the two companies remain up 58 per cent and 150 per cent year to date respectively – their recent drops are emblematic of the air pocket that big tech stocks suddenly find themselves in.
Could investors be worried about the earnings these companies are going to deliver? Combined profits for the magnificent seven are tipped to rise 38 per cent in the March quarter reporting season that is just getting under way, while combined profits for the remaining 493 companies in the S&P 500 are expected to fall by 3.9 per cent.
But remember, investors have bid the equity market up in the belief that the Fed will cut interest rates and earnings will grow about 20 per cent across the calendar year.
So if rate cuts aren’t coming, the market needs the giants to deliver strong March quarter profits, and guide to continued earnings growth for the rest of the calendar year. There appears to be some concern that won’t happen.
We’ll know a lot more by this time next week, with Tesla, Amazon, Meta and Microsoft to deliver their March quarter numbers in the coming days.
