Stocks fall ahead of high-stakes mega-cap earnings: Market recap

(Bloomberg) — Stocks fell at the end of a turbulent week, with earnings from tech giants set to come at a critical juncture on Wall Street.

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Most S&P 500 groups fell Friday as the index suffered its worst week since April. That followed a rotation that saw investors trim positions from this year’s winners into laggards. The move was supported by bets that the 2024 rally would extend beyond mega-caps as the Federal Reserve cuts rates. The rapid repositioning prompted calls for a pullback that engulfed various sectors alongside technology ahead of the sector’s results.

Next week will be important for the near-term trajectory of equity earnings, with many large-cap technology companies reporting results, said Glen Smith of GDS Wealth Management. If we were to see the powerful combination of strong tech earnings and slowing inflation, it could reverse the recent weakness in markets and spark a new bull run.

After the plunge, the Magnificent Seven, a cohort of mega-caps, ended the week down 5%. Across the tech space, losses were more pronounced among chipmakers. A closely watched proxy for semiconductors like Nvidia Corp. and Intel Corp. fell nearly 9%. Even as investors cooled on rotation trading, small caps climbed more than 1.5% during the period.

The S&P 500 index fell to about 5,500 points Friday. The Nasdaq 100 was down about 1%. The Russell 2000 index of smaller companies fell 0.6%. Behind a massive computer outage that grounded flights and disrupted businesses around the world is cybersecurity company CrowdStrike Holdings Inc. Its stock fell as much as 15% before paring losses.

In addition to a slew of earnings releases next week, traders will be paying attention to key economic reports, including the Fed’s preferred price index, which is expected to keep bets on a September rate cut. Still, Treasury yields edged higher across the curve on Friday.

Economic data has softened and that supports looser monetary policy ahead, said Cayla Seder of State Street. While lower rates are good for small caps that are hurting more by rising rates, we are not convinced it is a major turning point at this point.

George Cipolloni of Penn Mutual Asset Management says part of the recent rotation is due to money flowing out of an overly concentrated market and into unloved and undervalued sectors.

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“I think overly concentrated markets can be a harbinger of more volatile markets,” he said. “All it takes is a big earnings drop or a negative headline from a heavily weighted company to send major indices down.”

Tesla Inc. and Alphabet Inc. will be the first of the Seven Wonders to report results Tuesday. Analysts will likely quiz Elon Musk’s electric-vehicle giant on the progress of its robotaxis plans. And investors will be poring over details of how Google’s parent company is boosting revenue with artificial intelligence.

Traders will then have to wait until the following week, when Microsoft Corp., Meta Platforms Inc., Amazon.com Inc. and Apple Inc. report results. Nvidia's results won't be released until the end of August.

For the first time since 2022, S&P 500 earnings may not be exclusively tech-driven, Bloomberg Intelligence strategists led by Gina Martin Adams wrote this month. While forecasts for the Magnificent Seven remain strong, their earnings are likely to slow in the second quarter, just as the rest of the S&P 500 could finally post its first annual growth in at least five quarters.

There is a risk of a setback for stocks this summer, according to strategists at Goldman Sachs Group Inc., who say the market is more likely to experience a correction than a bear market in the second half of the year.

This could be the result of a combination of weaker growth data, already more dovish expectations from central banks and growing political uncertainty ahead of the US election, strategists led by Christian Mueller-Glissmann wrote.

Investors have flocked to U.S. stocks as they become increasingly confident that the Fed will cut rates by September and that Donald Trump will win the U.S. presidential election, according to strategists at Bank of America Corp.

U.S. equity funds absorbed about $45 billion, the fourth-largest inflow on record in the week through Wednesday, a team led by Michael Hartnett wrote in a note, citing data from EPFR Global. Small-cap funds saw $9.9 billion in inflows, the second-largest on record, while large-cap funds received $27.4 billion.

Hartnett also said stocks are likely to fall after the Fed cuts rates, calling it a buying rumor and a selling reality. His team is also bullish on bonds, as he expects Trump’s new tariffs over the next 12 months to be deflationary rather than inflationary.

After spending two months dumping the market's best-performing stocks, hedge funds are now underweight the technology, media and telecommunications sectors to an all-time low.

Their net leverage, often seen as a barometer of risk appetite, fell to 54% in early July, the lowest level since January, according to the prime brokerage office of Goldman Sachs Group Inc.

This isn't a bear trade, though. Instead, savvy investors are preparing for a frenzied presidential campaign, and funds want cash ready to deploy immediately when stock volatility spikes and prices start to fluctuate.

Company Highlights:

• American Express Co. said it plans to increase its marketing spending even as growth in billings on the company's credit cards slowed in the second quarter.

• Nippon Steel Corp. has hired former U.S. Secretary of State Mike Pompeo to help finalize a proposed purchase of United States Steel Corp., a deal that faces bipartisan opposition from Donald Trump and President Joe Biden.

• SLB and Halliburton Co. said they expected strong international demand for crude oil drilling after reporting earnings that met or beat forecasts, supporting their shift to overseas markets.

• SunPower Corp. fell as Guggenheim Securities cut its price target on the solar equipment company to zero and said the stock could soon be delisted.

• Eli Lilly & Co.'s Mounjaro won Chinese regulatory approval for weight treatment less than a month after a similar therapy from Novo Nordisk A/S, fueling competition in a country that is one of the world's hardest hit by obesity.

Some of the main movements in the markets:

Actions

• The S&P 500 fell 0.7% as of 4 p.m. New York time.

• The Nasdaq 100 fell 0.9%

• The Dow Jones Industrial Average fell 0.9%

• The MSCI World Index fell 0.8%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%

• The euro fell 0.2% to $1.0880

• The pound fell 0.3% to $1.2911

• The Japanese yen was little changed at 157.50 per dollar.

Cryptocurrencies

• Bitcoin rose 5.1% to $67,073.76

• Ether rose 2.8% to $3,511.22

Obligations

• The yield on 10-year Treasury notes rose three basis points to 4.24%.

• Germany's 10-year yield rose four basis points to 2.47%.

• The UK 10-year yield rose six basis points to 4.12%.

Raw materials

• West Texas Intermediate crude fell 3.1% to $80.28 a barrel

• Spot gold fell 1.9% to $2,398.73 an ounce

This story was produced with assistance from Bloomberg Automation.

–With assistance from Sujata Rao, Isabelle Lee, Farah Elbahrawy, Henry Ren, Natalia Kniazhevich, Divya Patil and Richard Henderson.

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