Portfolio

Tech Stocks Sink as War Jitters Fuel Rush to Bonds

News July 30, 2024 at 02:50 PM
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What You Need To Know

  • Most shares in the S&P 500 rose, but renewed tech weakness weighed on the gauge, with Nvidia tumbling 5%.
  • While the Fed is expected to hold benchmark rates at the highest level in more than two decades, traders will be closely watching for any hints that the start of policy easing is near.
  • The S&P 500 Index has probably already logged the gains it will see this year, but the benchmark still presents opportunities for investors, says BofA.
A happy man on a green line going up and a scared man hanging from a red line going down

Stocks got hit by a selloff in the world's largest tech companies ahead of key central bank decisions. Bonds and gold climbed as traders rushed for safety amid geopolitical risks. Oil remained lower.

Israel's military struck Beirut, aiming at a Hezbollah commander, in response to a rocket attack on Saturday in the Golan Heights that killed 12 people.

Most shares in the S&P 500 rose, but renewed tech weakness weighed on the gauge — with Nvidia Corp. tumbling 5%.

After a $2.3-trillion Nasdaq 100 wipeout, investors awaited Microsoft Corp.'s results amid concern that firms aren't yet seeing returns from artificial intelligence. Its numbers will set the scene for reports from other heavyweighs this week, with markets also gearing up for Wednesday's Federal Reserve decision.

"If the Fed does not signal a September rate cut, markets could get a bit ugly given recent tech weakness — especially if earnings underwhelm," said Tom Essaye at The Sevens Report.

What Happens to Stocks After First Rate Cut? | S&P 500 average return one year following first rate cut after past six hiking cycles

While the Fed is expected to hold benchmark rates at the highest level in more than two decades, traders will be closely watching for any hints that the start of policy easing is near. In the run-up to the announcement, data showed U.S. consumer confidence rose on an improved outlook for the economy and job openings beat forecasts.

The S&P 500 fell to around 5,435. The Nasdaq 100 slid 1.5%. A gauge of the "Magnificent Seven" megacaps sank 2%. The Russell 2000 of small firms was little changed.

Microsoft said it has started to resolve an outage affecting its Azure cloud service. CrowdStrike Holdings Inc. plunged on a report Delta Air Lines Inc. hired an attorney after a tech outage. Procter & Gamble Co. sank on a sales miss. JetBlue Airways Corp. soared on a turnaround plan.

Treasury 10-year yields dropped four basis points to 4.14%. West Texas Intermediate crude hovered near $75.

The yen rose. Bank of Japan Governor Kazuo Ueda will be under intense scrutiny Wednesday when he unveils his plans for quantitative tightening and delivers a decision on the policy interest rate.

Recent yen weakness has done more harm than good for the Japanese economy, according to Japan's newly appointed top foreign exchange official.

Issues Facing Big Tech, Market Rally

The continuing broadening of this year's powerful stock market rally hangs on what the Fed does and says about interest rates after its two-day meeting wraps up on Wednesday.

Since the latest consumer price index print showed signs of cooling inflation, traders have stepped up their rotation out of Big Technology shares and into everything from small-capitalization stocks to value plays.

If the Fed is about to begin a rate reduction cycle, stock bulls have history on their side. In the six prior hiking cycles, the S&P 500 Index has risen an average 5% a year after the first cut, according to calculations by the financial research firm CFRA.

What's more, the gains also broadened, with the small-cap Russell 2000 Index climbing 3.2% 12 months later, CFRA's data show.

Goldman Sachs Group Inc. Chief Executive Officer David Solomon said one or two Fed rate cuts later this year are looking increasingly likely, after predicting just two months ago there would be no rate reductions in 2024.

"One or two cuts in the fall seems more likely," Solomon said Tuesday in a CNBC interview from Paris. "There's no question there are some shifts in consumer behavior, and the cumulative impact of what's been kind of a long inflationary pressure, even though it's moderating, is having an effect on consumer habits."

The S&P 500 Index has probably already logged the gains it will see this year, but the benchmark still presents ample opportunities for investors, according to Bank of America Corp.

While neutral on the index overall, BofA's Savita Subramanian says there's potential for strong returns in a few areas: among dividend payers, "old school" capital-expenditure beneficiaries like infrastructure, construction and manufacturing stocks, and other themes that don't revolve around artificial intelligence.

"In mid-2023, sentiment was deeply negative and our toolkit suggested that the direction of economic and earnings surprises was more likely positive than negative," Subramanian, the firm's head of U.S. equity and quantitative strategy, told clients in a note dated July 29. "Today, sentiment is neutral and positive surprises are ebbing."

(Credit: Adobe Stock)

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