$3 Trillion in Market Cap Is Gone — But Here’s the Good News
After a very narrow index-driven uptrend, market players will need to work harder now to produce quality returns.
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A surprisingly poor July employment report and a mediocre earnings report from Amazon AMZN shocked the market to end a difficult week. Almost overnight, there was broad concern that the economy was on the brink of a recession.
Interest rates fell sharply as the odds that the Fed cuts rates by 0.5% at its next meeting in September jumped to over 70% from just 22% the prior day. There is now an intense debate about whether the Fed may have made a policy mistake by not cutting rates already.
The market was already struggling as it has been repricing big-cap technology stocks that have discovered they will have to spend billions more before they have an economic payoff from AI. The S&P 500 has lost around $3 trillion in market cap in the last two weeks. The Russell 2000 IWM suffered its worst two-day loss since the COVID crisis in 2020.
There was a sea of red out there, with the exception of the mighty Apple AAPL. Apple posted earnings that beat both revenue and eps estimates and received some target increases from analysts. I have to admit that I’m perplexed by its valuation, which gives it a tailing P/E of 33, although it has single-digit EPS and revenue growth. The market must view it as a safe harbor in the sea of chaos and a good place to park money. It illustrates that there is still plenty of cash out there looking for a place to go.
The big question now is whether this shift in the market action and the sudden belief that a recession is going to occur will drive deeper correction and a potential bear market?
It is a difficult question to answer because we never really had a real bull market. We had a very narrow index-driven uptrend, but the majority of stocks never participated. While some folks say there was a bubble in AI names, if there was, it was just in a handful of stocks, and they are already correcting. It is very likely that the Magnificent Seven stocks will struggle for a while and have little momentum. However, there are still many stocks in the market that are good values and in a position to navigate a potential recession.
It was inevitable that a shakeup like this would eventually occur, and the good news is that it would lead to a new crop of opportunities. I believe we will see much more emphasis on stock picking and that fundamentals and good charts will matter to a much greater degree. Market players got fat and lazy sitting in the Magnificent Seven stocks for years, and now they will need to do some hard work to produce quality returns.
Have a great weekend. I’ll see you on Monday.
At the time of publication, Rev Shark was long AMZN.
