Stocks Caught in Tug of War Between Tech and Rest: Markets Wrap

(Bloomberg) — A renewed rout in the world’s largest technology companies dragged down the stock market in the last few minutes of trading, despite gains in areas that would benefit the most from Federal Reserve rate cuts.

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About 300 companies in the S&P 500 advanced — but the index itself fell. While economically sensitive groups such as energy, industrial and financial shares rose, the US equity benchmark’s most-influential sector got hit. The cohort of tech megacaps that has led the bull market continued to largely underperform smaller firms — which have rallied almost 10% in July.

After the S&P 500 marched from one record to the next in the first half of the year, some investors grew concerned that only a handful of companies were participating in the rally. Corners of the market outside of big tech have barreled higher amid confidence the Fed is taming inflation without breaking the economy — and will soon be able to cut interest rates.

“We’re in the midst of a great, rate-led rotation from tech to everything else,” said Callie Cox at Ritholtz Wealth Management. “Sure, it’s been painful, but it may be worth weathering this storm for what could come on the other side. Believe in this bull market, or risk getting left behind.”

Not everyone is buying the rotation theme. At Birinyi Associates Inc., Jeff Rubin says what is actually occurring is the more typical correction. “And in a correction, it is hard to find a safe place to hide, but this will pass and will allow you to buy stocks that you wished you had bought months ago.”

The S&P 500 closed below 5,400, extending a pullback from its all-time high to almost 5%. That’s just halfway to what’s normally considered a correction. The Russell 2000 of smaller companies climbed 1.3%, while a measure of the “Magnificent Seven” slipped 1.1%. Alphabet Inc. slid as OpenAI is testing new search features. Ford Motor Co. sank the most since 2008 on an earnings miss.

Equities rallied earlier Thursday after data showed the pace of US growth picked up from the previous quarter — while moderating from last year. Some equity traders also welcomed the fact that the figures bolstered market bets on a rate cut in September — and not earlier as that could signal officials “worried” about a bigger economic slowdown.

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“Goldilocks is getting stronger and the risk of stagflation is fading,” said David Russell at TradeStation. “There’s not much ‘stag; and not much ‘flation’. This kind of GDP report is a potential tailwind for corporate earnings that keeps us on pace for lower rates going forward.”

To Chris Zaccarelli at Independent Advisor Alliance, the US economy is much stronger than people realize and to the extent that markets were worried about a growth slowdown, they should breathe a sigh of relief after Thursday’s data.

“More volatility is to be expected – especially as we get closer to the election – and as long as the economy avoids a recession, then this bull market will continue through 2024 and well into 2025,” he noted. “So we would take advantage of any pullbacks along the way.”

While there is a growing risk the current pullback continues, there is plenty of support before the longer-term uptrend is challenged, according Adam Turnquist at LPL Financial.

“Volatility came back with a vengeance this week as selling pressure in the megacap space dragged down the broader market,” he added.

Yung-Yu Ma at BMO Wealth Management says the catch-up trade in smaller stocks should still have room to run.

“Earnings growth among smaller companies is set to improve by year end, and the Fed will soon begin a year-long rate cutting campaign which will disproportionately benefit smaller companies.”

Corporate Highlights:

• Dexcom Inc. plunged in late New York trading after the company cut its full-year sales forecast for the glucose monitoring devices relied upon by diabetics.

• Meta Platforms Inc. is facing its first European Union fine over allegations it abused its dominance in the classified ad market by tying Facebook Marketplace to its social network.

• EssilorLuxottica SA confirmed Meta Platforms Inc. is interested in buying a stake in the world’s biggest eyewear maker.

• American Airlines Group Inc. cut its earnings outlook as it works to bounce back from earlier blunders that will weigh on revenue and profits for the rest of 2024.

• New York Community Bancorp reported provisions for loan losses higher than every analyst’s estimate.

• Harley-Davidson Inc.’s second-quarter revenue exceeded analysts’ estimates on higher shipments and better sales of pricier motorcycles in North America. It also announced a $1 billion share buyback.

• Lululemon Athletica Inc. sank as analysts raised fresh concerns about the company’s ability to hit financial targets due to ongoing product execution issues and slowing active wear trends.

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.5% as of 4 p.m. New York time

• The Nasdaq 100 fell 1.1%

• The Dow Jones Industrial Average rose 0.2%

• The MSCI World Index fell 0.8%

• Bloomberg Magnificent 7 Total Return Index fell 1.1%

• The Russell 2000 Index rose 1.3%

Currencies

• The Bloomberg Dollar Spot Index was little changed

• The euro was little changed at $1.0845

• The British pound fell 0.4% to $1.2851

• The Japanese yen was little changed at 153.83 per dollar

Cryptocurrencies

• Bitcoin fell 2.2% to $64,622.32

• Ether fell 8% to $3,106.9

Bonds

• The yield on 10-year Treasuries declined four basis points to 4.24%

• Germany’s 10-year yield declined three basis points to 2.42%

• Britain’s 10-year yield declined three basis points to 4.13%

Commodities

• West Texas Intermediate crude rose 0.7% to $78.14 a barrel

• Spot gold fell 1.5% to $2,361.64 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Jessica Menton.

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