The fall has started, now everything depends on a hair

The long-awaited rotation has started in the American market, the technology stocks that have been leading the market so far are falling at a fast pace, while the other sectors are less spectacular. The technology sub-index of the S&P 500 lost nearly 6 percent of its value in just over a week, with $900 billion in capitalization evaporated. Meanwhile, apparently due to interest rate cut expectations and Trump’s improved chances, investors are channeling money into the sectors that have performed weaker so far this year.

This can be seen in the fact that the entire S&P 500 index fell by only 1.6 percent, as the poor performance of tech stocks was partially offset by the good performance of the financial, industrial and smaller companies. The index’s gain this year is still 16 percent. The factors behind the movement seem to be supported by the results of Bank of America’s latest fund manager survey, which we wrote about in more detail here.

It is also possible that the fall will not last long in the case of technology stocks, as quite important flash reports will arrive this week and these could reverse the unfolding correction, Reuters pointed out in its summary analysis. Tesla and Alphabet (Google’s parent company) will both report their numbers on Tuesday, marking the start of the Magnificent Seven reporting season. Microsoft and Apple will be next week.

If they deliver good results, it may ease fears about them being overpriced. At the same time, signs of a decrease in profits, or if the expenses related to artificial intelligence do not grow as expected, could have the opposite effect. In connection with the latter, many fear that a bubble has formed in the market, which is now starting to deflate.

And this could be a serious problem for the market as a whole, since the shares of Alphabet, Tesla, Amazon, Microsoft, Meta Platforms, Apple and Nvidia accounted for about 60 percent of the increase in the S&P 500 this year. We wrote more about this here.

According to forecasts, the entire technology sector could increase its profit by 17 percent year-on-year in the quarter, in the communication services sector this figure could reach 22 percent (this includes Meta and Alphabet). Meanwhile, according to the consensus of LSEG IBES, the expansion of the entire S&P 500 index could be 11 percent.

The increased rotation this week, i.e. the fact that investors sold the technology sector while other sectors were less, and even bought, is basically due to some developments. One is the inflation report at the beginning of the month, which confirmed the expectations of the Fed’s interest rate cut in September and the assassination attempt against Trump last week, which increased Trump’s presidential chances. meanwhile, according to a report earlier this week, the United States is considering tighter restrictions on exports of advanced semiconductor technology to China. The Philadelphia SE Semiconductor Index, the main benchmark for chipmaker stocks, has fallen about 8 percent since last week.

Despite the falls, a number of technical analysts remained optimistic. The numbers showing the internal structure of the market are not doing badly. Even though the indexes are falling, the number of rising stocks is higher than the number of falling stocks. According to them, this indicates that money is migrating from the previous market leaders to other, smaller papers and will ease the tension in the longer term. The big problem with the current bull market was that the good performance was limited to companies with large capitalization and this seems to be changing now, the laggards are starting to pick up the rhythm.

According to Ned Davis Research, the share of advancing stocks was 2.5 times greater than that of declining stocks. However, after such periods, the S&P 500 tends to increase by an average of 4.5 percent over the next three months. The risk is that if the fall becomes uncontrollable in tech stocks, it could drag down the market as a whole.