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Portfolio > Economy & Markets

Magnificent 7 Extend This Week’s Rout to 5%

By Rita Nazareth

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What You Need to Know

  • Technology stocks led losses in the S&P 500 Friday, with the gauge poised for its worst week since April.
  • Within the overall tech space, losses have been more pronounced in chipmakers.
  • Earlier this week, investors flocked to U.S. equities as they grew more certain of a September rate cut by the Fed.

Stocks got hit at the end of a wild week, with results from tech giants set to arrive at a critical moment on Wall Street.

Tech led losses in the S&P 500 Friday, with the gauge poised for 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 in the run-up to 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 in stocks.”

After the selloff, the “Magnificent Seven” cohort of megacaps is ending 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. has tumbled 8.5%. Even as investors cooled down on the rotation trade, small caps have gained about 2% in the span.

In what will go down as the most spectacular IT failure the world has ever seen, a botched software update from cybersecurity firm CrowdStrike Holdings Inc. crashed countless Microsoft Corp. Windows computer systems globally. Both companies have rolled out fixes and systems are being restored.

The S&P 500 dropped to around 5,500. The tech-heavy Nasdaq 100 fell 1%. The Russell 2000 Index of smaller firms slid 0.5% after resuming ticking in the wake of a third-party technical issue.

CrowdStrike sank as much as 15%, before paring losses. American Express Co. slipped after warning of higher marketing spending amid a slowdown in billings growth. Treasury 10-year yields advanced three basis points to 4.23%. The dollar fluctuated.

S&P 500 Is Set for Worst Week Since April

Tesla Inc. and Alphabet Inc. will be the first of the “Magnificent Seven” megacaps 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.

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 are flocking to U.S. equities as they grow more certain of a September cut by the Fed and that Donald Trump will win the U.S. presidential election, according to Bank of America Corp. strategists.

U.S. 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 its 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,” as opposed to market expectations.

Sharp Unwind in Large Cap Growth Stocks | Large cap growth stocks made a 24-year high against small cap value peers

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.

(Credit: Adobe Stock)

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