Investors are ditching some of this year’s favourite trades as a retreat in the glitzy megacaps risks snowballing into a multi-pronged selloff that has hit everything from cryptocurrency to gold, and made calling the market’s next move ever more complex.
Shares on Wall Street on Wednesday suffered their worst daily selloff since late 2022, with the tech-heavy Nasdaq Composite dropping 3.6% and the S&P 500 down 2.3%. Both gauges recovered from some of those losses on Thursday.
The 2024 “everything rally” - stocks, and especially tech, up; gold and crypto - up; dollar - up; emerging markets, up - may be on hold.
A diverse set of factors has lit the fuse of market anxiety over how stretched valuations in Big Tech might be, against a backdrop of rising U.S.-China trade tensions and tepid earnings.
Quarterly results from Tesla and Alphabet, the first of Wall Street’s most valuable companies to report, have unnerved investors ahead of a deluge of results next week.
Microsoft reports on Tuesday, followed by Meta Platforms on Wednesday, and then Amazon and Apple on Thursday. Those four companies have a combined stock market value of over $9 trillion and account for a fifth of the entire S&P 500.
“Investor positioning was pretty pro-risk and people had become quite positively inclined towards markets and valuations had become quite stretched,” said Toby Gibb, head of investment solutions at fund manager Artemis in London.“It’s difficult to call whether the market is going to continue correcting.”
Volatility has picked up, with the VIX index rising on Wednesday by the most in a day for two years.
The S&P 500 is trading at almost 22 times expected earnings, an over-two year high, according to LSEG data. The benchmark’s recent dip has left it up 14% in 2024.
“On the upside, (markets) are valuation insensitive and this is the same on the downside. The volatility compression you have on the way up goes in the opposite direction on the way down,” Mario Baronci, portfolio manager at Fidelity International, said.
Wall Street’s AI boom has created a two-tier stock market, with megacap stocks driving most of the S&P 500’s ascent to record highs, as the rest mostly bumble along.
Keith Lerner, co-chief investment officer at Truist Advisory Services, maintains a favourable long term view on tech stocks but believes they may be vulnerable to more volatility going forward.
“Tech is correcting following the strongest two-month relative outperformance since 2022,” he wrote in a Thursday report. “Our base case is that the longer-term bull market remains intact, but it’s often two steps forward, one step back.”
Meanwhile, China’s economy is slowing faster than economists and Beijing authorities anticipated, sucking commodities into the down-draught. Europe’s home-grown luxury megacaps, another favoured trade, have shed a quarter of a trillion dollars in value since their peak in March.
Adding to the mix is a rollercoaster race for the White House, where Democrat President Joe Biden rescinded his candidacy for Vice President Kamala Harris shortly after an assassination attempt on Donald Trump. The Republican candidate’s anti-China rhetoric and potentially inflationary policies have hit chipmakers around the world and hurt U.S. 30-year government bonds.
But some big investors are certain this is a bull market dip that became undeservedly shrouded in geopolitical risk language.
“I think these narratives are being used to create some excuse for what was probably just some sort of summer profit taking,” said Richard Clode, tech portfolio manager at Janus Henderson Investors.
Comments