Tech Storms Back After Rout With Earnings in Focus: Markets Wrap

(Bloomberg) — Stocks rebounded after their worst week since April as investors looked beyond Joe Biden ending his reelection campaign to focus on the start of the tech earnings season.

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The megacap space rallied, with the Nasdaq 100 up 1.2%. Despite the recent slump that had some on Wall Street bracing for a summer correction, respondents to Bloomberg’s Markets Live Pulse survey expect earnings to reinvigorate the S&P 500. With results from Tesla Inc. and Alphabet Inc. on deck Tuesday, nearly two-thirds of the 463 respondents to the questionnaire expect corporate profits to boost US equities.

Sky-high valuations and seasonal weakness have incited some pullback warnings, with traders also facing political uncertainties. Yet the market reaction to Biden’s decision to quit the race and endorse Kamala Harris has so far been fairly muted, with the US dollar little changed and Treasuries marginally higher.

“This political shake up shouldn’t materially alter the direction of the markets,” said Tom Essaye at The Sevens Report. “The ultimate direction of the S&P 500 will still be determined by economic growth.”

The S&P 500 rose to 5,540. A Bloomberg gauge of the “Magnificent Seven” megacaps climbed 2.2%. Tesla Inc. and Nvidia Corp. added at least 3.5%. CrowdStrike Holdings Inc. tumbled 12% amid the continued fallout from a faulty software update from the cybersecurity firm. The Russell 2000 of smaller firms fell 0.2% after last week’s surge.

Treasury 10-year yields slid two basis points to 4.22%. Investors will also be focused this week on US economy readings, especially the Federal Reserve’s preferred inflation gauge for clues on whether the central bank will be able to slash rates in September.

The recent outperformance of US small caps is facing technical resistance and lacks fundamental drivers to carry on for a longer period of time, according to Morgan Stanley’s chief US equity strategist Mike Wilson.

“While we’re respectful of still light sentiment/positioning in small caps, we see limited fundamental and macro justification for small cap outperformance continuing in a durable manner,” Wilson and his team said in a note to clients.

Hedge funds aggressively cut risk across their long and short books and at the fastest pace since January 2021, according to a note by Goldman Sachs Group Inc.’s prime brokerage desk. The move came amid last week’s market rotation into small caps and increased volatility.

The aggressive shift away from US technology giants into some of the stock market’s laggards looks set to continue as traders expect the Fed to cut interest rates later this year, but fundamentals still don’t support chasing small-cap shares, according to Morgan Stanley’s Lisa Shalett.

“Fade the chase in small caps, which is likely unsustainable,” she wrote.

Corporate Highlights:

Verizon Communications Inc. reported operating revenue that missed analysts’ estimates as fewer people upgraded wireless equipment.
The bulk of McDonald’s Corp. US restaurants will extend the burger chain’s $5 meal deal in a bid to attract budget-strapped diners.
Delta Air Lines Inc. apologized for canceling thousands of flights during the busiest travel weekend of the summer as many of its systems failed following the catastrophic CrowdStrike Holdings Inc. IT outage on Friday.
Ryanair Holdings Plc cut its outlook for ticket prices in the crucial summer travel period and said fares will be “materially lower” as consumers grow more cautious, adding to pessimism that the post-pandemic rebound in flying is fizzling.
Berkshire Hathaway Inc. has sold off another block of BYD Co. shares, taking its stake in one of the world’s biggest carmakers to under 5% from more than 20% two years ago.

Key events this week:

Eurozone consumer confidence, Tuesday
US existing home sales, Tuesday
Alphabet, Tesla, LVMH earnings, Tuesday
Canada rate decision, Wednesday
US new home sales, S&P Global PMI, Wednesday
IBM, Deutsche Bank earnings, Wednesday
Germany IFO business climate, Thursday
US GDP, initial jobless claims, durable goods, Thursday
US personal income, PCE price index, University of Michigan consumer sentiment, Friday