A Slowing Economy and Reassessment of Big-Cap Tech Is Causing a Market Plunge
How will these huge themes impact market rotation heading into the worst time of the year on a seasonal basis?
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Stock markets around the world slid lower overnight following the worst performance of 2024 in the U.S. There was no single triggering event for the deluge of selling, but there is building concern that the economy is slowing quickly and that the Fed may be late to the game with interest rate cuts.
A related but contributing factor to the carnage is that the AI theme has lost its luster. For the last couple of years, the market has been mostly driven by a small group of large-cap technology names that are the leaders in AI.
Two groups of names leading the AI revolution: chip stocks such as Nvidia NVDA and Arm Holdings ARM, which provide the infrastructure for the computing power needed to train AI models; and software companies like Microsoft MSFT and Alphabet GOOGL, which will integrate AI into real-world use.
The chip sector of AI still has large demand, but there is increased competition, and names like Intel INTC are lagging badly. The AI software sector has discovered that it still has to make tremendous capital expenditures to implement AI, and that increased revenue is slow and inconsistent.
Amazon AMZN was the latest name Magnificent Seven name to disappoint with earnings, and even Apple AAPL was lower early on Friday morning despite beating on top and bottom lines. Microsoft and Alphabet also disappointed, and Meta META isn’t gaining momentum after a strong report.
This combination of a slowing economy and reassessment of the technology leadership is roiling the market, and it is not at all clear how this will develop from here.
There will be important job news on Friday morning, but the market is nearly certain that the Fed will cut interest rates. Bonds have priced in three full cuts of a quarter point each before the year ends, and there are growing signs of economic slowing. There is still some danger of stickiness in inflation, and if the jobs news is strong, we will probably start hearing the word "stagflation."
I’m most concerned about how these huge themes impact market rotation. We have had some very strong movement into the Russell 2000 IWM and the broader market, but will that continue as the Magnificent Seven names struggle and exhibit limited upside, or will the entire market fall under the weight of economic concerns?
Small-cap earnings season hits its peak next week, and we will be in the dog days of summer. We are heading into the worst time of the year on a seasonal basis, and that is likely going to make it more difficult as well.
Jobs news is at 8.30 am ET and is going to see a strong reaction. Stocks are gapping down significantly in the early going, and we are going to have a very volatile day of action.
At the time of publication, Rev Shark had no positions in any securities mentioned.
