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Why Did The Nasdaq See Its Largest Drop Since 2022 On Wednesday?

AInvestThursday, Jul 18, 2024 1:58 am ET
4min read

U.S. tech giants experienced their worst day in the past year on Wednesday: all of the Mag Seven stocks fell on the day, with Nvidia plunging more than 6.6%, Meta falling over 5%, and Apple, which recently regained the title of the world's most valuable company, also fell 2.5%.

Data shows that this dismal performance not only wiped out about $580 billion in market value for the Mag Seven yesterday but also directly led to the Nasdaq 100 index's largest single-day drop since December 2022.

Therefore, now, some investors are trying to figure out why the stock prices of tech giants suddenly started to turn downward after an astonishing rise in the first half of the year, and the key is, whether this downward trend is short-term or sustained.

Sector Rotation Could Be The Cause

Wall Street analysts believe that the sector rotation brought by the expectation of interest rate cuts in the stock market should be one of the important reasons for this round of adjustments in large-cap tech stocks: Wednesday's trend shows that the large-scale stock market rotation that has troubled investors for most of the past week is still ongoing - including hedge funds.

As the expectation of the Federal Reserve starting to cut interest rates in September has significantly increased, many funds have started to flow out of safe options like the Mag Seven and into those less eye-catching small roles or small companies that have been suppressed by high interest rates and pessimistic expectations over the past two years.

For example, data shows that the small-cap index Russell 2000 has recently outperformed the S&P 500 index by 8.5 percentage points, showing an excellent performance that has not been seen since March 2020.

In artificial intelligence, which has been popular in recent years, many investors are also turning their attention to some former laggards, including Intel and IBM. The common characteristic of these companies is that they have been considered to be obviously lagging in AI progress in the past few years, and they also have more or less problems in profit expectations and market value growth, so the market popularity is not high.

However, these past big market laggards are now becoming the winners in the market: in the past month, the stock prices of IBM and Intel have both risen by more than 10%, surpassing Nvidia, Apple and other past market favorites. Compared with the red big-cap tech stocks yesterday, these two stocks' gains of 0.88% and 0.35% yesterday are even more eye-catching.

Chip Stocks Become The Hardest Hit Area

It is worth noting that amid the miserable decline, chip stocks have become the hardest hit area of market negative sentiment: on the day, Nvidia fell more than 6%, AMD fell more than 10%, TSMC fell 8%, and Qualcomm's stock price decreased by nearly 9%. The analysis points out that the sharp decline in chip stock prices may be the key factor in triggering market negative sentiment, and the tendency of the U.S. government to impose more trade restrictions on chip manufacturers has led to this round of sharp declines.

Although the result of this year's presidential election is still uncertain, both Trump and Biden have recently revealed the idea of imposing more restrictions on the chip industry: the Biden administration recently told allies that they are considering implementing stricter export restrictions on advanced semiconductor technology from Tokyo Electron and ASML, and Trump's recent remarks on geopolitics have also caused concerns about TSMC's future.

This news on the chip front is the kind of UFO (UnForeseen Occurrence) that could indeed create the kind of selling that could be the catalyst for a tradable correction in the stock market, said Matt Maley of Miller Tabak + Co.

Can The Stock market Continue To Move Forward Without The Big Tech Company?

Although the stock market has given a pleasing performance in the first half of the year, the sudden decline of the Nasdaq and the S&P on Wednesday also let many people see the hidden dangers behind this prosperity.

There have been voices before that, according to experience, the correlation between the U.S. economic surprise index and the P/E ratio of the S&P 500 index is very high, but this year the two have shown a large difference. If following the historical pattern, the huge gap between the two will eventually be filled - either the stock market will adjust sharply, or the U.S. economy will suddenly take off - but the U.S. economic indicators have shown signs of fatigue, and the Federal Reserve cannot cut interest rates significantly under inflationary pressure, so the probability of the stock market adjusting is increasing.

In a report by Goldman Sachs on Wednesday, it pointed out that under this background, global hedge funds have reduced their holdings of U.S. stocks for five consecutive days. The bank's data shows that the value of stocks sold by hedge funds in the past five trading days is not only the highest level since November 2022 but also close to the highest level in the past five years.

Moreover, the report from Goldman Sachs shows that hedge funds have sold U.S. tech stocks in seven out of the past eight trading days. This may also explain part of the reason for the sharp decline in big-cap tech stocks, especially chip stocks, on Wednesday.

Scott Rubner, a strategist at Goldman Sachs Group, said that although there have been many cases of sharp rebound in the stock market, especially tech stocks, in the past few months, he believes that the S&P 500 now has no other way to go but down.

Rubner said that in addition to the historical pattern, he also found that the upcoming August is usually the month when market funds flow out most severely from passive stocks and mutual funds through data tracing back to 1928. Considering this seasonal disadvantage, the current excessive positions, and the background that all good news has been digested by the market, he believes that the S&P 500 is on the edge of a summer correction.

Jonathan Krinsky from BTIG also pointed out: While the rotation out of mega-cap tech into cyclical and small-caps is encouraging, it felt a bit forced happening in such a short period. Even if this is going to be a more long-lasting rotation, we likely won't be able to see that new leadership until after we see a higher correlation correction and then see what leads coming out of that.

The market is nearing the end of the typical bullish window, Krinsky said.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.