This past week saw the stock market take on an entirely different tone than what had preceded for the first half of July. Following the shooting and the rowdy Republican National Convention that propelled Donald Trump into a broad lead for the White House, fresh fears of trade relations with China and the possibility of a new round of tariffs negatively impacted the all-important technology sector in a large way.
A softer-than-forecast third-quarter guide from Dutch chip equipment maker ASML Holding N.V. (ASML) punished the semiconductor equipment sector, even as the company reported record bookings that will ramp sales in the fourth quarter. Again, the selloff was more driven by growing concerns of export tariffs under a Trump administration coming at a time when scores of portfolio managers are vacationing.
It didn’t help matters that a global meltdown within Windows operating systems stemming from a software upgrade brought major disruptions to airports around the world, caused emergency management systems to not function properly and caused media companies and financial institutions to have their normal business operations disrupted. The bearish momentum just built on itself with the market devoid of bullish catalysts.
And then came Sunday’s breaking news that President Joe Biden will not run for re-election and has put his full support behind Vice President Kamala Harris. Ongoing pressure from senior Democratic leaders and big donors brought about what was an inevitable decision to change course. How the market reacts to this news is unknown, but heading into the weekend, it seemed as if this political turbulence was priced in. As it stands, the Democratic party could still hold a mini-primary if the powers-that-be are not behind Kamala, and investors will probably know this is a going forward plan this week.
Aside from the volatile landscape of politics, bond traders are growing more confident that the Fed will find it best to cut rates not just in September, but also in November and possibly December. This perception caught a strong tailwind the past two weeks, not just rewarding small caps, but real estate, staples, utilities, industrials, materials and financials. While big-cap tech is pausing its rally and consolidating, most of this year’s neglected sectors caught a strong rotational bid. For the second week in a row, the equal-weight S&P 500 beat its cap-weight peer.
Looking ahead over the next two weeks, the bulls are looking to benefit from a few upside catalysts that include a parade of blue-chip earnings that includes most of the mega-cap tech companies that have powered the market higher year-to-date on the back of a tsunami of capital investment into artificial intelligence (AI) products and services. The backdrop for a robust earnings season is supported by the Atlanta Fed’s GDPNow model projecting second-quarter real GDP growth climbing to a 2.7% annual rate, from a 1.4% pace in the first quarter. Regardless of politics, growth is growth, and is what the stock market cares about most.
Later this week, the Fed’s favorite inflation indicator, the Personal Consumer Expenditures (PCE) Index, will be released with the Street looking for a monthly gain of 0.1% for June on the headline number and 0.2% on the Core PCE number. With summer officially half over, it is good to see the national average price of gasoline working lower from the April high.
Despite the turmoil in the Middle East and the extended production cuts by OPEC+ nations, WTI crude prices have declined to $80/bbl from $84/bbl on July 3. This would imply cheaper gas prices in the month ahead, being that gas prices always lag oil prices on the way down. The University of Michigan Consumer Confidence Survey is due out this Friday in tandem with the PCE report. Considering the newfound anticipation of future rate cuts being priced into the bond market with yields coming down, a low inflation read for June and a slide in gas prices should bode well for improving sentiment among consumers.
While it is all well and good that the market has broadened out, there is no getting around the fact that the Magnificent Seven still own the leadership role for the S&P 500 and the Nasdaq. Just nine stocks make up over 50% for both the S&P and Nasdaq, of which the Magnificent Seven stocks are all top 10 holdings. What is highly attractive about this pre-earnings season set up is that all the Magnificent Seven stocks have pulled back well off their early July highs and now show themselves as being oversold by most technical indicators.
This is the time for the tech sector to shine and retake its rightful position as the stock market’s torch bearer. The selling pressure of late in the Magnificent Seven stocks resulted in a collective loss of $1.13 trillion in market capitalization over five sessions last week, the biggest such loss since May 2022. Given all wild events that have transpired over the past several days, investors are due for some good news in the form of strong sales, earnings and bullish guidance from those companies whose stocks matter most to the bull trend. It is time for America’s tech titans to shine, and it’s a good bet they will.
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