Stocks Rocked by Late-Week Swoon in Tech Giants: Markets Wrap

This content was published on December 27, 2024 - 22:20

5 minutes

(Bloomberg) — A selloff in the world’s largest technology companies hit stocks in the final stretch of a stellar year.

In another session of slim trading volume — which tends to amplify moves — the S&P 500 lost 1.1% and the Nasdaq 100 slipped 1.4%. While every major industry succumbed to Friday’s slide, tech megacaps bore the brunt of the selling. That’s after a torrid surge that saw the group dubbed “Magnificent Seven” account for more than half of the US equity benchmark’s gains in 2024.

“I think Santa has already come. Have you seen the performance this year?” said Kenny Polcari at SlateStone Wealth. “It’s Friday, next week is another holiday-shortened week, volumes will be light, moves will be exaggerated. Don’t make any major investing decisions this week.”

Steve Sosnick at Interactive Brokers says that while Friday was shaping up to be a quiet holiday-season day, he’s been fielding more inquiries than expected.

“The best I can figure out is that there are large accounts, pension funds and the like, who need to rebalance their holdings before year-end,” he said.

The S&P 500 and the Nasdaq 100 trimmed this week’s gains. The Dow Jones Industrial Average slipped 0.8% Friday. A gauge of the “Magnificent Seven” sank 2%, led by losses in Tesla Inc. and Nvidia Corp. The Russell 2000 index of small caps dropped 1.6%.

The yield on 10-year Treasuries rose four basis points to 4.62%. The Bloomberg Dollar Spot Index wavered.

Funds tied to several of the major themes that have driven markets and fund flows over the past three years stumbled during the week ending Dec. 25, according to data compiled by EPFR.

Redemptions from cryptocurrency funds hit a record high while technology sector funds extended their longest outflow streak since the first week of 2023, the firm said.

This year’s rally in US equities has driven the expectations for stocks so high that it may turn out to be the biggest hurdle for further gains in the new year. And the bar is even higher for tech stocks, given their massive surge in 2024.

A Bloomberg Intelligence analysis recently found that analysts estimate a nearly 30% earnings growth for the sector next year, but tech’s market-cap share of the S&P 500 index implies closer to 40% growth expectations may be embedded in the stocks.

“The market’s largest companies and other related technology darlings are still being awarded significant premiums,” said Jason Pride and Michael Reynolds at Glenmede. “Excessive valuations leave room for downside if earnings fail to meet expectations. Market concentration should reward efforts to regularly diversify portfolios.”

John Belton at Gabelli Funds says valuation alone is not a reason to be bearish on the US equity market, but impacts risk/reward in the near-term.

Yet Belton notes the “Magnificent Seven” still look like a well-positioned group.

“I remain bullish on the tech sector, despite concerns about high valuations,” said David Miller at Catalyst Funds. “The growth potential, particularly driven by AI, justifies these valuations, as it significantly enhances productivity for companies.”

“Large cap valuations appear expensive, and the US economy sits in the late stage. As a result, the road ahead may be shorter than the bull market’s age alone would suggest,” said Pride and Reynolds at Glenmede.

While the current boom from 2022 to present has seemed quite extraordinary it has been the second shortest bull market, with the second smallest cumulative gains, since 1928, they noted. Historically, bull markets that were both late cycle and had premium valuations at the two-year mark lasted on average 38 months.

“The combination of a young bull market, a late-cycle expansion and premium valuations justifies a neutral risk posture given the relatively balanced implications for risk assets,” the Glenmede strategists concluded.

To Tom Essaye at The Sevens Report, sentiment is no longer euphoric and markets will start the year with regular investors much more balanced in their outlook — and that would be a “good thing as it reduces air pocket risk,” but advisors have largely ignored the recent volatility.

“It’s fair to say that this recent dip in stocks has taken the euphoria out of individual investors, but it has not dented advisors’ sentiment,” he said. “And if we get bad political news or Fed officials pointing towards a ‘pause’ in rate cuts, that likely will cause more short, sharp drops.”

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