Technology stocks had a brutal day on Wednesday, with the S&P 500 (SPX) dropping sharply and the Nasdaq Composite (NDAQ) registering its worst day since 2022. The large-cap tech benchmark Nasdaq-100 (NDX) tumbled, clocking in its largest daily drop since last August.
Yet, the Dow Jones Industrial Average (DJIA), which until recently strongly underperformed its tech-heavy peers, extended its rally, marking its third consecutive record. This was the first time in 25 years that the blue-chip index rose while the S&P 500 declined more than 1%. The index’s gains confirmed the budding trend of investor rotation out of tech large caps in the wake of surging September rate-cut expectations. However, for small-cap stocks, this trend is still unconfirmed, as the Russell 2000 snapped its five-session rally. After surging by over 11% in the last few days, the small-cap benchmark was looking overbought, and investors searched for undervalued stocks elsewhere.
The sharp market declines were led by semiconductor stocks, with the iShares Semiconductor ETF (SOXX) plunging by over 7%. Recent economic data, along with Jerome Powell’s remarks, have upped the odds that the Fed will start with rate reductions in September to over 90%. That sparked a rotation out of tech stocks, widely perceived as richly valued, into more cyclically oriented sectors.
Several developments have coincided to accelerate this trend, starting with soft sales guidance from the world’s most important high-end chip machinery maker ASML (ASML). Later, the report that the Biden administration is considering clamping down further on the chip equipment sales to China, reverberated through the whole semis sector. In addition, Donald Trump, whose odds at winning the November’s election are on the rise, said that Taiwan should pay the U.S. for its defense against possible Chinese hostility, sending the shares of the world’s largest advanced-chip maker Taiwan Semiconductor Manufacturing (TSM) down sharply.
The notion that technology trade war with China is expected to aggravate no matter who wins the election took some steam out of the semiconductor trade, while also weighing on the larger tech universe, further supporting the rotation.
However, according to some strategists, the exit from the large-cap tech is not based on any shift in the fundamentals, but rather caused by investor worries over these stocks’ valuations after a long run up. The Big Tech names begin reporting their Q2 earnings at the end of July, with their earnings expected to continue outshining all other stock groups.
Second-quarter earnings for S&P 500 companies are expected to have risen about 9% year-over-year, their largest since 2022. Still, over a third of this increase is bound to be contributed by the Magnificent Seven giants. Apple (AAPL) is forecasted to show a very modest EPS growth, while Tesla (TSLA) is slated to report a strong year-over-year decline in earnings per share. The rest of the Magnificent pack is slated to report an average EPS surge of ~60%, with Microsoft (MSFT) and NVIDIA (NVDA) having previously hinted at surpassing Wall Street revenue estimates. However, investors will be strongly focusing on companies’ forecasts, specifically those concerning their artificial intelligence (AI) progress and spending, to try and decipher whether tech stocks can sustain their uptrend from current price levels.
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