Overnight, under the impact of the sharp decline in technology and chip stocks, the Nasdaq index fell 2.8%, and the Nasdaq 100 index fell nearly 3%, marking the largest single day decline since December 2022. The Russell 2000 small cap stock index, which has attracted market attention, also fell more than 1%. Goldman Sachs analysts bluntly stated that the adjustment of the US stock market has just begun and advised investors not to buy on dips.
As heavyweight stocks, the "seven tech giants" all closed down, with Nvidia leading the way with a drop of over 6.6% and Apple falling 2.5%. The total market value of the "Seven Giants" evaporated by about 580 billion US dollars in a single day, and the cumulative market value evaporated by 1.1 trillion US dollars in five trading days.
It is worth noting that among the top ten components of the S&P 500, only Berkshire Hathaway's B-class stock rose, with a 1.53% increase, to $445.61, approaching a historical high. In the past five trading days, the increase reached 7.69%, and so far this year, it has risen nearly 25%.
Berkshire Hathaway's stock price has been continuously rising recently, which reflects that the focus of the US stock market may be gradually shifting from technology stocks to value stocks. The Dow Jones Industrial Average, which gathers blue chip stocks, closed up 0.59% overnight at 41198.08 points, setting a new historical high for six consecutive days.
The market generally believes that the significant fluctuations in the stock market are still stimulated by the expectation of interest rate cuts by the Federal Reserve and the advance of the "Trump trade", and that American tech giants are facing a "valuation kill" under high valuations.
Scott Rubner, Managing Director of Global Markets at Goldman Sachs, stated that there is a high possibility that the S&P 500 index will continue to decline and advised investors not to buy on dips during market downturns. July 17th is usually the turning point for US stock returns, while August is typically the month with the most significant loss of funds from index funds and mutual funds
For small cap stocks, Goldman Sachs analyst Brian Garrett said that the market needs to be wary of short-term fluctuations and corrections in small cap stocks. Historical data shows that small cap stocks typically experience a certain degree of correction (about 2%) after experiencing a short-term surge (such as a 10% increase in 10 days).
For value stocks, Nanette Abuhoff Jacobson, a global investment and multi asset strategist at Wellington Investment Management, and Karoline Klimova, an investment strategy analyst, told Xinhua Finance that structural inflation and rising real interest rates will contribute to the trend of US value stocks. Investors should pay more attention to the balance of their asset portfolios after experiencing a long-term rebound in growth stocks.
Short term upward momentum of technology stocks is insufficient
Scott Rubner wrote in a report to clients on Wednesday that the S&P 500 index may continue to decline and advised investors not to buy on dips. For the US stock market, the painful trading that is starting now is that the stock market is no longer rising
Rubner believes that the US stock market will begin to face the problem of weak capital inflows and be more susceptible to negative news. Due to the deployment of funds in the third quarter, it is expected that there will be no inflow of funds from index funds or mutual funds in August. As for trend tracking system funds, their long positions are close to the extreme and there is no further buying space.
Goldman Sachs announced in a report released on the 17th that hedge funds have reduced their exposure to US stocks for five consecutive days, and the value of the stocks sold is the highest since November 2022. In the past eight trading days, hedge funds have sold US technology stocks net on seven trading days.
With the release of the second quarter report of the US stock market approaching, whether the performance of technology giants with high valuations hitting high expectations can match market expectations has become the key to future trends.
Bank of America Merrill Lynch predicts in a recent research report that 493 companies in the S&P 500, except for the "Big Seven" in technology stocks, are expected to break the trend of slowing profit growth in the past five quarters, and the profit growth of the "Big Seven" may slow down for the second consecutive quarter.
Yang Ao, Chief Chinese Market Analyst at FXTM, told Xinhua Finance that technology stocks may experience short-term fluctuations due to market uncertainty caused by elections. But in the long run, it is expected that the US stock market will continue to benefit from the booming development of artificial intelligence and semiconductor manufacturing, and the financial reports of technology stocks in the new quarter will become the key to the future trend of the US stock market.
David Morrison, senior market analyst at Trade Nation, recently stated that although it is too early to determine whether the rotation of the US stock market will become a long-term trend, such rotation will provide some boost to small cap stocks and previously overlooked sectors. Because any profit taking funds from overvalued technology stocks flow into neglected areas of the US stock market
Small cap stocks may experience fluctuations
Goldman Sachs analyst Brian Garrett stated in a report that the market needs to be alert to potential volatility in small cap stocks in the near future. Historically, the rise of the Russell 2000 index has usually been accompanied by a decrease in implied volatility, but unusually, in recent days, the implied volatility of the Russell 2000 has also been rising, indicating an increase in market expectations for its future volatility.
Garrett stated that this Friday is the option expiration date, and if traders have previously bought a large number of call options to hedge, the related hedging demand will disappear after these options expire, which may have an impact on the market.
From a fundamental perspective, some analysts believe that the recent significant rise in small cap stocks is not based on favorable company performance and lacks substantial fundamental support, thus there is a certain risk of a pullback. Garrett Melson, a portfolio strategist at Natixis Investment Managers Solutions, stated that he is currently not really considering chasing this uptrend. Historically, small cap stocks also rose before the Federal Reserve began a series of interest rate cuts in 1995, but as economic growth began to slow down, they did not continue their upward trend. I think we should pay more attention to the growth prospects of technology stocks in the coming months
Value stocks or relatively stable performance
From the trends of the S&P 500 Value Index and the Russell 1000 Value Index, it can be seen that in the first half of this year, value stocks continued to adjust sideways, but in the past week, their gains have both reached 3%. Berkshire Hathaway is clearly the representative of value stocks and also the largest component of the two major index ETFs mentioned above.
Jason Pride, head of investment strategy and research at Glenmede, believes that the valuations of growth stocks have been hovering at high levels this year, while the valuations of value stocks are currently relatively more reasonable.
Savita Subramanian, head of US equity and quantitative strategy at Bank of America Merrill Lynch, believes that the reasons for investors to increase their investment in cyclical industry value stocks have now become more compelling. Considering the macro environment, it will be the large cap value stocks that will lead the stock market to rise in the coming years
Wellington Investment Management explained to Xinhua Finance that value stocks are usually concentrated in mature cyclical industries such as finance, energy, materials, and industry. These industries often have the characteristics of low P/E ratios, stable cash flows, low growth rates, and high dividend yields.
Wellington Investment Management stated that the performance of value stocks may not necessarily be synchronized with the economic cycle, and in the coming years, structural inflation and rising real interest rates will contribute to the development of value stocks. After experiencing a long-term rebound in growth stocks, investors should pay more attention to the balance of their asset portfolio.