The surging US stocks finally pull back! Is this a "golden opportunity" or the prelude to a crash?
In the past few days, the US stock market has experienced a correction, with the S&P 500 Index and the NASDAQ Composite Index recording their largest single-day declines of 2022 and continuing to fall. Technology stocks have been the main reason for the recent decline in the US stock market, especially in the information technology and communication services sectors. Investors had high expectations for the financial reports of technology stocks, but reports from Alphabet and Tesla failed to impress investors. Next week, Apple, Meta, Microsoft, and Amazon will release their financial reports, which will impact the sentiment in the technology sector. The market expects that the financial reports of these tech giants may exceed investors' expectations
The crazy rise of the US stock market in 2024 has finally hit the pause button in the past few days.
On Wednesday, the S&P 500 Index (SPX) and the NASDAQ Composite Index (IXIC) recorded their largest single-day declines since 2022, and the decline continued on Thursday. Over the past 10 days, the S&P 500 Index has fallen by about 3%, while the NASDAQ Index has dropped by over 6%.
Regarding the recent pullback in the US stock market, Keith Lerner, Co-Chief Investment Officer at Truist, pointed out earlier that in years when the S&P 500 Index has risen by more than 10% in the first half of the year, there is usually an average pullback of about 9% in the second half of the year.
As of the end of June, the S&P 500 Index had risen by about 14%. In a report to clients on Thursday, Lerner wrote:
"We have been expecting recent market volatility, and in terms of price and time, there may still be further downside potential for the US stock market."
It is quite evident that technology stocks have been leading the recent decline in the US stock market. Among the 11 sectors of the S&P 500 Index, information technology and communication services are the only two sectors with negative returns in the past month. Lerner explained in an interview that given the rise in the technology sector, the recent sell-off makes sense.
Lerner's research shows that as of the end of June, technology stocks have outperformed the S&P 500 Index in the past two months, reaching the highest level since 2002. He believes that, "like an overstretched rubber band, technology stocks, after experiencing extreme excess returns, usually see a pullback, where a little bad news can have a big impact."
Currently, this "little bad news" comes from the earnings reports of Alphabet (GOOGL) and Tesla (TSLA) released after the market close on Tuesday. Lerner pointed out that these earnings reports were not actually bad, but they failed to impress investors because investors had high expectations for this quarter's earnings.
Earnings reports from Apple (AAPL), Meta (META), Microsoft (MSFT), and Amazon (AMZN) will be released next week, which will be the next test of investor sentiment towards the technology sector. Lerner believes that after the recent market pullback in the past few days, the latest earnings reports from other tech giants may exceed the lowered expectations of investors.
He said, " I believe the long-term trend of the bull market still exists, and funds will flow back. I just think that the US stock market is more likely to need a rest period, a pause that can rejuvenate the market."
Brian Belski, Chief Investment Strategist at BMO Capital Markets, also emphasized the possibility of a pause in the stock market rally. Similar to Lerner's analysis, Belski's research shows that going back to 1949, in the second year of a bull market in the US, there is usually an average pullback of about 9%, with the recent bull market starting in October 2022 Belski stated on Tuesday that, from an emotional perspective, the market "has matured to the point where a pullback is needed." However, for Belski, this is a "buying opportunity." His research indicates that the market typically rebounds an average of 14.5% from the bottom of the pullback in the second year of a bull market. He said, "By the end of the year, the stock market will rise."