With Nvidia falling more than 3% for two consecutive days in the last two trading days of last week, and its market value evaporating over $200 billion, there are temporary signs of weakness in the rise of technology stocks.
In the past week, the S&P 500 index has risen by 0.61%, the Nasdaq index has risen almost negligible, and the Dow Jones Industrial Average has risen 1.45%, marking the largest weekly increase since mid May.
Fawad Razaqzada, senior analyst at Jiasheng Group, told 21st Century Business Herald reporters that technology stocks have been under some downward pressure recently, and we need to consider how much speculation has been digested by the current market. Some people believe that the market overestimates the optimistic sentiment of artificial intelligence. Some people believe that buying on dips near short-term support levels is still the preferred strategy. Traders can take advantage of this trend, but given the deteriorating macro situation and overvaluation, reasonable risk management strategies must be adopted.
Correspondingly, Keith Lerner, Co CIO of Truist, also stated that the technology industry's rating has been downgraded to "neutral". Although Lerner still holds a positive long-term view on technology stocks, in the short term, the market seems to be a bit excessive and he will not pursue the technology industry now.
Expectations of Fed rate cuts heating up
At a time when the rise of technology stocks is facing challenges, the expected increase in interest rate cuts by the Federal Reserve has provided some support for the US stock market.
Consumption has always been an important force supporting US economic growth, but now this pillar is weakening. According to data from the US Department of Commerce, retail sales in May, known as "terrifying data," increased by 0.1% month on month, lower than market expectations of a 0.3% increase. The April data was adjusted from flat month on month to a 0.2% decrease. Excluding gasoline, the retail data increased by 0.3% month on month.
The weakening of consumption is also causing a series of chain reactions, and retail sales data means that the possibility of the Federal Reserve lowering interest rates in September is greater. Entering the second quarter, the cooling trend of the US economy has become increasingly evident, with economic indicators such as weakened price pressures and weak retail sales providing support for the Federal Reserve's interest rate cuts.
A series of recent US economic data have performed poorly. The number of initial claims for unemployment benefits in the United States for the week ending June 15th recorded 238000, higher than the expected 235000; In May, the construction of new homes in the United States decreased by 5.5%, the lowest level in four years. The construction of new homes decreased from 1.35 million in April to 1.28 million.
Although the Federal Reserve's June chart indicates that it will only cut interest rates once this year, the pricing in the interest rate market still firmly believes that the Federal Reserve will cut interest rates twice. According to the Chicago Mercantile Exchange's Federal Reserve observation tool, the market still generally expects the Federal Reserve to cut interest rates twice in September and December, respectively.
At present, the Federal Reserve is facing a difficult path. On the one hand, premature interest rate cuts may lead to persistent stubborn inflation. On the other hand, maintaining excessively high interest rates may trigger unnecessary economic slowdown or even recession, and the Federal Reserve must find a balance between the two risks.
Therefore, the Federal Reserve is very cautious. Since the beginning of the year, inflation data has shown a consolidation trend, with no significant downward trend, and interest rate cuts have not yet begun. The Federal Reserve will adopt a cautious attitude towards policies in the second half of the year and will not release loose signals rashly. The Federal Reserve needs to observe inflation data for the coming months in order to make more precise decisions.
Intensive onset of risk events
Looking forward to the next week, China will release the official PMI data for June, the final value of the real quarterly GDP rate in the first quarter of the United States and the core PCE price index in May will be released, the Bank of Sweden, the Bank of Türkiye and the Bank of Mexico will announce interest rate resolutions, the Summer 2024 Davos Forum will open in Dalian, Nvidia will hold the annual shareholders' meeting, the American presidential candidates Biden and Trump will hold the first television debate, Iran will hold the presidential election, and France will hold the national assembly election.
This week, the Federal Reserve's favorite inflation data will be released, and on Friday, the US Department of Commerce will release the core PCE price index for May. Economists expect the growth rate to decrease from 0.2% to 0.1%. The core PCE price index growth rate in April fell to its lowest level since April 2021. If the May data continues to cool inflation, it will provide more confidence for the Federal Reserve to cut interest rates.
Richmond Fed Chairman Thomas Barkin stated that the current policy positioning is good, and the Fed has the firepower needed to curb inflation. Before lowering interest rates, it is necessary to further clarify the inflation path. "My personal opinion is to gain more faith before taking action."
In addition, the Federal Reserve will release the results of its annual bank stress tests, and the risks faced by banks under high interest rates cannot be ignored. The sharp increase in interest rates has led to a significant depreciation of long-term bonds held by banks, with bond trading prices far below face value, forcing banks to come up with various ways to compensate for huge losses. The report from the Federal Deposit Insurance Corporation (FDIC) shows that Bank of America's unrealized losses in the first quarter were $516.5 billion, an increase from the previous quarter.
For the market, although there are many optimistic voices on Wall Street, the potential risks cannot be ignored. Sam Stovall, Chief Investment Strategist at CFRA Research, warned that the S&P 500 index is about to adjust and may fall 5% under pressure from three factors: Federal Reserve interest rates, inflation, and stock valuations. The current P/E ratio of the S&P 500 index is 32% higher than the average P/E ratio of the past 20 years, and the current P/E ratio of technology stocks is 68% higher than the average level of the past 20 years.
Marko Kolanovic, Chief Market Strategist at JPMorgan Chase, reminds that any upward momentum must come from profit growth. But even in the best case scenario, profit growth is not enough to bear stock risks. He predicts that the profit growth of the S&P 500 index will be below average, and the index's earnings per share in 2024 will only be $225, slightly higher than the $221 in 2023.
Global Financial Calendar
Monday (June 24th)
Dallas Federal Reserve Business Activity Index for June, Bank of Japan Announces Comments of Review Committee for June Monetary Policy Meeting
Tuesday (June 25th)
Canada May CPI, US April FHFA House Price Index, US April S& P/CS: 20 Major City Housing Price Index, June US Consumer Confidence Index, June Richmond Fed Manufacturing Index, San Francisco Fed Chairman Daley's Speech on Monetary Policy and Economy, Federal Reserve Director Bowman's Speech on Monetary Policy and Bank Capital Reform, Summer Davos Forum 2024 held in Dalian (until the 27th)
Wednesday (June 26th)
Germany's July Gfk Consumer Confidence Index, annualized total new home sales in the United States in May, Federal Reserve Director Bauman's speech, Nvidia's annual shareholder meeting
Thursday (June 27th)
Domestic refined oil will open a new round of price adjustment window, the Federal Reserve will release the annual bank stress test results, the Eurozone economic climate index in June, the final value of the annual quarterly rate of real GDP in the first quarter of the United States, the final value of the annual quarterly rate of the core PCE price index in the first quarter of the United States, the EU Summit (to the 28th), the Swedish Central Bank will release the interest rate resolution, and the Türkiye Central Bank will release the interest rate resolution
Friday (June 28th)
The Mexican central bank announced interest rate resolutions, US presidential candidates Biden and Trump held their first televised debate, Iran held presidential elections, US May core PCE price index, US June Chicago PMI, Japan May unemployment rate, June Tokyo CPI index, US June Michigan University Consumer Confidence Index, Richmond Fed Chairman Balgin delivered speeches.
Sunday (June 30th)
France Holds National Assembly Elections, China Official PMI Data for June