The recent decline in stock markets can be attributed to several key factors, as outlined by Sevens Research in a note on Monday.
Throughout 2024, the S&P 500 has enjoyed support from “solid economic data, impending Fed rate cuts, falling inflation, and AI enthusiasm.” However, recent developments indicate that this bullish trend is encountering significant challenges.
According to Sevens Research, the primary factor behind the current market downturn is a rotation out of technology stocks. This shift began as investors rebalanced their portfolios in anticipation of the expected Fed rate cuts in September and intensified last week following disappointing earnings reports from major AI-related tech companies.
“Last week’s underwhelming earnings are challenging the AI enthusiasm that has driven the S&P 500 to mid-5,000 levels,” noted Sevens Research.
The significant decline in the Nasdaq, particularly evident on Wednesday, reflects growing concerns over the profitability and future prospects of AI.
Looking ahead, Sevens Research believes the upcoming week is critical for tech stocks and AI enthusiasm. High-profile earnings reports from Microsoft (NASDAQ), Apple (NASDAQ), Amazon (NASDAQ), and Meta (NASDAQ) are expected to either reinforce or further diminish investor confidence in AI.
“If these companies provide disappointing guidance, it will further erode AI enthusiasm and we could see this pullback continue,” warned Sevens Research. Additionally, the week will be crucial for assessing the broader economic landscape.
Three major economic reports and the Fed’s decision on rate cuts could either confirm the “Goldilocks environment” or raise concerns about economic slowdowns.
Despite these uncertainties, Sevens Research anticipates that, barring significant surprises, the market should maintain expectations for solid growth and rate cuts in September.
In summary, while the tech sector faces immediate headwinds, particularly concerning AI’s profit potential, broader economic indicators and forthcoming earnings reports will be crucial in determining whether the current pullback will persist or reverse.
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