Xinhua Finance and Economics, Shanghai, July 25 (Ge Jiaming) Due to the poor earnings of Google and Tesla, the market risk aversion is heating up, technology stocks have suffered a sharp sell-off, the three major indexes fell across the board on the 24th, and the fear index VIX rose sharply.
The S&P 500 closed down 2.3%, the Nasdaq fell more than 3.6%, both the biggest drop since the end of 2022, the blue-chip Dow fell 1.2%, and the fear index VIX surged 22% to a three-month high.
The "Big Seven of Technology Stocks" were all wiped out, falling 5.9%, and the total market value evaporated by $768 billion, the largest one-day decline since October 2022, and nearly $1.75 trillion from its July high: Tesla closed down more than 12%, the largest one-day decline since September 2020; Nvidia fell 6.8%, Meta fell more than 5.6%, Google fell more than 5%, the biggest decline since January, Microsoft fell about 3.6%, Amazon fell about 3%, and Apple fell about 2.9%.
Analysts generally believe that the sharp sell-off in U.S. stocks overnight reflects the market's dependence on technology stocks, raising concerns about their overvaluations, and through the earnings reports of Google and Tesla, investors speculate that the U.S. tech giants in the second half of the year may face the problem of higher spending but slower revenue growth.
While tech and chip stocks fell, defensive sectors of US equities (utilities, consumer staples, health care, and energy) bucked the trend, similar to what happened in 2000 when the dot-com bubble burst.
Analysts said that not only the fundamentals of technology stocks "collapsed" the U.S. stock market, but also worries about the United States economy itself dragged down U.S. stocks, United States the preliminary Markit manufacturing PMI in July unexpectedly shrank to a seven-month low, and a number of economic indicators, including the unemployment rate, lit up recession signals, calling on the Federal Reserve to cut interest rates in July.
Kristina Hooper, chief global market strategist at Invesco, told Xinhua Finance that although the probability of a rate cut in July is still small, if the Fed sees signs of further downturn in the economy, especially the labor market, it is more likely to start cutting interest rates in July.
Technology stocks tumbled and defensive sectors rebounded
Yesterday, Tesla and Google announced their financial reports one after another, Tesla's operating profit in the second quarter plummeted by 33% year-on-year, and the gross profit margin of a single car fell to 13.9%, far lower than market expectations, while the self-driving taxi (Robotaxi) has no more incremental information, and it will take longer to land, and the current high valuation level may be difficult to support, Tesla's stock price fell 12%, the largest one-day decline since September 2020.
From Google's earnings report, Google's revenue and profit in the second quarter both exceeded expectations and search advertising and Google Cloud business performed steadily, but the problem is that Google is expected to continue to increase capital expenditures, so the market expects that Google may face a slowdown in revenue growth in the second half of this year and an increase in input and output, in this case, earnings per share (EPS) is likely to be faster than the slowdown in revenue, which also makes investors worry about whether the high valuation can be maintained, and Google's class A shares closed down more than 5% on the day.
At the same time, it is reported that OpenAI may face a huge loss of up to $5 billion this year, based on undisclosed internal financial data and analysis by relevant sources, which also makes it even more uncertain for investors when the huge investment in AI will pay off.
On the one hand, OpenAI's total operating costs are expected to reach $8.5 billion this year, and in terms of revenue, although ChatGPT has shown strong potential, users tend to use the free version of ChatGPT, and revenue is expected to be between $3.5 billion and $4.5 billion this year.
Alec Young, chief investment strategist at United States market data platform MAPsignals, said that now that the investment spending of tech giants is high, the market realizes that the return on investment may take some time, and in the short term, the giants' rally will be affected.
Risk aversion rose in the market, and highly-valued technology stocks pulled back sharply, with the Philadelphia Semiconductor Index falling 5.41% and the Nasdaq closing down 3.6%. But at the same time, defensive sectors such as utilities, consumer staples, healthcare and energy all rose: energy rose more than 0.2%, healthcare rose more than 0.8%, and utilities rose more than 1.1%.
Jim Reid, head of global economics and thematic research at Deutsche Bank, said the U.S. stock market experienced similar volatility when the dot-com bubble burst in 2000. Technology stocks attracted a lot of money before the tech bubble burst in March 2000 when defensive sectors such as consumer staples, health care and utilities fell sharply. When the bubble burst, risk aversion prompted a rapid return of capital, with defensive sectors rising 35-45% at the end of 2000 compared to March when the bubble burst.
Huang Senwei, senior market strategist at AllianceBernstein Fund, told Xinhua Finance that from the perspective of stock market concentration, the seven U.S. stock giants currently account for 30.2% of the entire S&P 500 index, which is at a high level compared with the level before the bursting of the world's most famous bubbles in the past.
But from the perspective of price-earnings ratios, at least about 4-5 of the current U.S. tech giants have good earnings prospects, and they have not reached the situation before the bubble burst, Huang said: the expected P/E ratio of the U.S. stock seven in the next 24 months is 25 times. Before the dot-com bubble in 2000, the price-to-earnings ratio of leading companies rose to 52 times; Before the financial bubble in Japan in the 90s, the number of dominant companies was 67 times. From a valuation perspective, United States tech companies aren't valuing too much right now, unlike they were before the last few bubble bursts.
From a technical point of view, according to the Goldman Sachs Group's trading desk, both the S&P 500 and Nasdaq 100 have triggered sell signals from commodity trading advisors (CTAs), and if the stock market continues to fall in the coming month, trend traders could see $67.1 billion outflow from U.S. stocks.
United States economic weakness signals flickering
Kristina Hooper, chief global market strategist at Invesco, told Xinhua Finance that the current high valuation of the United States stock market means that the market has digested a lot of optimism. But there is still a risk of a "hard landing" for the United States economy.
Recently, warning signs of continued economic weakness in the United States have appeared one after another: the preliminary Markit manufacturing PMI in United States in July unexpectedly shrank to a seven-month low, new home sales in United States in June fell for two consecutive months to the lowest annualized total since November last year, the trend of cooling consumption in United States continues, retail sales in United States in June increased by zero month-on-month, and the unemployment rate in United States climbed to 4.1% in June.
The latest Citi research notes that the United States economy may be at a turning point, and if the labor market continues to weaken, it could trigger economists' warnings of a recession, and the next few weeks will determine whether the recent United States economic weakness is only seasonal or the beginning of a broader economic slowdown.
The United States second-quarter gross domestic product (GDP) report due on Thursday and the PCE price index for June on Friday will provide more clues about the Fed's interest rate path and the future direction of the United States economy.
What's next for U.S. stocks?
Kristina Hooper believes that in a "hard landing" scenario, assets such as cash, defensive stocks (e.g. consumer staples, health care, utilities), long-duration sovereign bonds and currencies (Switzerland franc and yen) are bullish.
Huang Senwei, senior market strategist at AllianceBernstein, predicts that the U.S. stock market may see a style switch and industry rotation in the second half of this year. In terms of corporate operations themselves, from the perspective of the "Big Seven" and the year-on-year earnings growth rate of the S&P 500 after excluding the Big Seven, the technology sector fell 14% in the small bear market of U.S. stocks in 2022, while the S&P 500 after deducting the U.S. Seven rose 9.8%, because the earnings growth of the U.S. Seven Heroes performed worse than other companies in 2022.
Technology stocks have outperformed in 2023, rising 35.3%, while the S&P 500, excluding the U.S. Seven, is down 2.5% as tech earnings are outperforming, while other companies have seen a decline in earnings last year. In the first half of this year, the U.S. stock market was still dominated by technology stocks because of its fast earnings growth, while the earnings growth of the other 493 companies was relatively low.
Huang Senwei believes that by the second half of this year, the earnings growth gap between U.S. technology stocks and other stocks may begin to narrow. If the Fed's rate cut in the second half of the year is the main tone of the market, the pressure on small-cap stocks will start to unleash, which is why we have seen small-cap stocks in the United States perform better recently.
Editor: Wang Yuanyuan
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