You want to be in cyclicals over defensives: John Stoltzfus
US stocks fell as disappointing results from social-media firms and weak economic data added to recession fears. Treasuries rallied as traders dialed back bets on Federal Reserve hikes, while the dollar retreated.
The S&P 500 dropped for the first time in four days, while the tech-heavy Nasdaq 100 underperformed major benchmarks, closing down 1.8 per cent. Snap Inc.’s poor results and Twitter Inc.’s sales miss raised concern about online ad spending and weighed on shares of Facebook parent Meta Platforms Inc. and Google owner Alphabet Inc. Hardware and storage companies including Micron Technology Inc. and Western Digital Corp. fell after Seagate Technology Plc’s earnings miss and weak outlook.
Despite Friday’s churn, the equity market posted its best week in a month, paring this year’s market rout to about 17 per cent. Speculation that the worst of the selloff has passed is partly behind the move. But angst about the damage from inflation, rapidly rising interest rates and recession fears is proving hard to shake despite a tempering in expectations for Fed aggressiveness next week.
“The Fed meeting is crucial,” Quincy Krosby, chief global strategist at LPL Financial, said by phone. “Does the Fed rhetoric become less hawkish? Because what the market may be expecting that the Fed goes into the summer months and comes out perhaps a little bit less hawkish. But it’s a question mark because it depends on the trajectory of inflation.”
In other earnings news:
- American Express Co. rallied after reporting record revenue and raising full-year forecasts.
- Verizon Communications Inc. slumped after it missed profit estimates and cut guidance.
- HCA Healthcare Inc. soared after an earnings beat.
Snap’s results have become a barometer for ad spending amid mounting economic concerns. There are growing signs that tech companies are preparing for a recession with some pulling back on hiring, while Meta has lost about half of its value this year after disappointing revenue forecasts. Meta and Alphabet are scheduled to report earnings next week.
Underscoring recession fears, Treasuries extended an advance, pushing the 10-year yield to around 2.7 per cent. US business activity contracted in July for the first time in more than two years, according to the S&P Global flash composite purchasing managers output index.
That prompted swaps traders to pare bets on Fed hikes, shifting toward pricing a 50-basis-point hike in September as more likely than a three-quarter-point move. Swaps targeting next week’s meeting briefly indicated a 75 basis-point increase was slightly less than certain.
Meanwhile, German short-term bonds soared as investors trimmed bets on European Central Bank rate hikes after weaker-than-expected PMI data in the region fanned fears of a recession.
Oil posted a weekly loss with softer European economic data and signals of US fuel demand stalling souring the market’s outlook. West Texas Intermediate slipped below US$95 a barrel.
More market commentary
- “The market has experienced a selloff due to multiple compressions, not due to lower earnings,” Alicia Levine, head of equities, BNY Mellon Wealth Management, said in an email. “The recent earnings in social media are a reminder that there is earnings risk in these pummeled sectors ... which still may not be priced into the market. Further, there is macro risk to earnings in general after weak US and European PMI’s this morning.”
- “Expectations heading into the reporting cycle are ultra-low and well priced in most sectors,” Art Hogan, chief market strategist at B. Riley Wealth, wrote. “Another potential positive is that market participants may have reached a peak in pessimism at the same time that inflation has likely peaked. With pessimism at a peak, and inflation receding, the market may be at the ever elusive capitulation point and see more constructive action in the second half.”
- “The message of the week is clear: bulls clearly took control of markets,” said Florian Ielpo, head of macro research at Lombard Odier Asset Management. “For now, sentiment is in the driver seat and the previously excess pessimism is now resulting in a relief rally: investors cannot complain about that.”
- “It’s still very early days but we’ve seen numerous cases now of earnings surprises driven by the ‘it’s not as bad as we feared’ argument,” said Craig Erlam, a senior market analyst at Oanda. “That’s a relief of course, but surely not a case for a sustainable rebound.”
Some of the main moves in markets:
- The S&P 500 fell 0.9 per cent as of 4 p.m. New York time
- The Nasdaq 100 fell 1.8 per cent
- The Dow Jones Industrial Average fell 0.4 per cent
- The MSCI World index fell 0.5 per cent
- The Bloomberg Dollar Spot Index fell 0.2 per cent
- The euro fell 0.2 per cent to US$1.0208
- The British pound was unchanged at US$1.1995
- The Japanese yen rose 1 per cent to 136.02 per dollar
- The yield on 10-year Treasuries declined 12 basis points to 2.76 per cent
- Germany’s 10-year yield declined 19 basis points to 1.03 per cent
- Britain’s 10-year yield declined 11 basis points to 1.94 per cent
- West Texas Intermediate crude fell 1.8 per cent to US$94.58 a barrel
- Gold futures rose 0.5 per cent to US$1,739.30 an ounce