Wall Street steadied Thursday after a recent tech rout, helped by better-than-expected U.S. growth figures, although chip stocks in Europe and Asia suffered heavy declines.
The Nasdaq Composite rose 0.2% in late morning trading in New York, erasing earlier declines after the tech-heavy index suffered its worst day in 18 months on Wednesday, falling 3.6%.
The rebound comes after the U.S. economy expanded at a 2.8% annualized rate in the second quarter, beating forecasts and dispelling concerns about a slowdown in global growth.
U.S. chipmakers, which had been buffeted by a combination of disappointing earnings, geopolitical tensions and a rotation into smaller, unloved stocks, recovered from earlier losses, with Nvidia up 0.3% and chip equipment supplier KLA up 1.5%.
Arm Holdings, on the other hand, fell 6%, while European and Asian technology stocks also fell. The Stoxx Europe 600 Technology Index lost 2.7%, and Dutch chipmaking equipment maker ASML, Europe’s largest tech company, lost 3.2%. In Seoul, shares of SK Hynix slid 8.9%, the biggest drop since March 2020, as investors took profits on concerns about its high valuation and the possibility of a slowdown in investment in artificial intelligence by big tech groups.
The sharp declines in Europe and Asia mark a reversal of the frenzy around technology stocks, and AI-related stocks in particular, that have contributed most of the stock gains this year. They also underscore the severity of the penalties investors impose on companies that fail to meet their profit targets.
“We had seen such strong earnings reports at the start of this season that the market was not prepared for the bad news… Now we are seeing indiscriminate selling,” said Emmanuel Cau, head of European equity strategy at Barclays, who added that low summer liquidity could exacerbate market moves.
Everyone is on vacation, not to mention all the noise and anxiety about U.S. politics and slowing growth in Europe and China, Cau added. Bad news is bad news again, and profits are no longer much help.
Expectations that the Federal Reserve will soon cut borrowing costs have triggered a shift of investors away from high-flying big tech companies and into unloved segments of the market such as small stocks.
U.S. Treasuries continued their recent rally, fueled by hopes of lower interest rates and demand for safe assets. The U.S. two-year yield, which falls when prices rise, fell 0.06 percentage points to 4.36%, its lowest level since early February. It rose to 4.4% after the release of stronger-than-expected U.S. GDP data.
Alphabet shares fell 0.4%, adding to a 5% decline on Wednesday after concerns about rising AI-related capital spending outweighed the company's strong second-quarter earnings.
The reaction to the positive report underscored that market optimism about the tech sector's prospects has created a significant hurdle for companies to overcome, said Mark Haefele, chief investment officer of global wealth management at UBS.
German chipmaker Infineon Technologies fell 6.1% on Thursday, BE Semiconductor lost 14% and Swiss semiconductor group STMicroelectronics fell 12.6% after lowering its 2024 sales estimates. The Stoxx Europe 600 index fell 0.7% to its lowest level since May.
Japan's Topix stock index, which hit a record high this month, fell 3%, erasing its gains from July and hitting a five-week low. South Korea's Kospi index, which is heavily weighted toward technology stocks, fell 1.7%.
Japan's top semiconductor maker Renesas fell 14%, the biggest one-day drop since March 2019, after disappointing market earnings expectations. Other Japanese semiconductor companies including Advantest and Tokyo Electron also fell sharply.
The sharp decline in the Topix in recent days coincides with the yen's continued rise against the U.S. dollar and what traders say is turning into a precipitous exit from the so-called carry trade, in which speculators borrow yen cheaply to invest in higher-yielding assets elsewhere.
Since weakening to 161.6 against the dollar on July 10, the yen has strengthened just under 5.7% to 152.53 on Thursday. The currency weakened to 153.87 after a stronger-than-expected U.S. GDP.
Traders believe the yen's rapid turnaround is partly due to alleged intervention by Japanese authorities in the foreign exchange market this month. But growing expectations of a rate-cutting cycle in the United States are now pushing the yen higher.
Masashi Akutsu, head of Japanese equity strategy at Bank of America, described the recent combination of stock and currency volatility as a summer storm centered in the United States. Profit-taking in big tech stocks has been a dominant theme, he said in a note to clients.
While some of this rotation may be reversed in the future, it is unlikely to be completely reversed as long as Fed rate cuts are on the horizon, he said.
