The recent pullback in stocks can be traced to several key factors, according to Sevens Research in a note Monday.
The firm said that throughout 2024, the S&P 500 has benefited from "solid economic data, impending Fed rate cuts, falling inflation, and AI enthusiasm." However, recent developments suggest that the bullish trend is facing challenges.
According to the firm, the primary driver behind the current market decline is a rotation out of technology stocks. This shift is said to have began as investors adjusted their portfolios in anticipation of September's expected Fed rate cuts and intensified last week due to disappointing earnings from major AI-related tech companies.
"Last week’s soft earnings are challenging the AI enthusiasm that has been responsible for the S&P 500 rallying into the mid 5,000’s," noted Sevens Research.
The sharp decline in the Nasdaq, especially evident on Wednesday, is said to reflect the growing concern over AI’s profitability and future prospects.
Looking ahead, Sevens believes the upcoming week is critical for tech stocks and AI enthusiasm. High-profile earnings reports from Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), and Meta (NASDAQ:META) are expected to either bolster or further dampen investor confidence in AI.
"If they post disappointing guidance, it will further erode AI enthusiasm and we could see this pullback continue," warned Sevens Research. Additionally, they state that the week will be pivotal for evaluating 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.