The Dow Jones Industrial Average hit a historic high, and more than half of the constituent stocks of the S&P 500 index rose, but at the same time, the sharp decline in technology stocks dragged down the Nasdaq by 0.85%
Are you familiar with this scene?
That's right, in the early stages of the US stock market's rotation last month, the market actually operated roughly like this. At present, people are extremely cautious about technology stock trading before the release of Nvidia's financial report, and at the same time, the expectation of the Federal Reserve's interest rate cut has increased people's anticipation of a soft landing. A similar scene is happening again.
As of Monday's close, the S&P 500 index fell to 5616.84 points, with few transactions throughout the day. In contrast, weighted indices such as the S&P 500, which give small cap companies equal weight and influence as tech giants, continue to hover around historical highs, and the breadth of market leading stocks has expanded to a wider range of sectors. The Dow Jones Industrial Average rose to a record high of 41420.05 points during the trading session.
NVIDIA Financial Report
Regarding this, Ohsung Kwon, a strategist at Bank of America, stated that Powell almost locked in a September rate cut at the Jackson Hole Central Bank Annual Meeting, which allows our argument for market breadth expansion/rotation to remain unchanged. Of course, people should not ignore Nvidia's financial performance this week, which is a continuous driving force for the S&P 500 index return rate. If the financial performance is disappointing, there are still risks in the market.
Scott Rubner, Managing Director of Global Markets at Goldman Sachs, pointed out that the strong inflow of funds from corporate buybacks and systemic funds should drive the S&P 500 index to a historic high this week, further increasing investors' fear of missing out (FOMO) sentiment.
He estimates that up to $17 billion in non emotional demand will come from machine trading and corporate buybacks every day this week. Commodity trading advisors (CTAs) will conduct a so-called 'green sweep' in the coming week, which means that these funds may buy stocks regardless of how the market trades.
Mark Hackett, the head of investment research at Nationwide, stated that in the past few weeks, the market has entered a healthy track, breaking free from excessive dependence on several major tech companies in the first seven months of this year. He pointed out that despite this, we are currently in a 'market pause period'. He pointed out that historically, September was the worst month on the calendar, so investors should expect some volatility, especially if key indicators such as PCE inflation data, Nvidia's earnings report, or upcoming salary releases disappoint.
According to CFRA data, September has always been the weakest month for stock performance, with the S&P 500 index averaging a 0.78% decline since World War II.
Chris Larkin of E * Trade, a brokerage platform under Morgan Stanley, believes that in order for the stock market to reach new highs this week, it may be necessary to avoid any major surprises in its financial reports, especially for Nvidia, which has been driving trading sentiment in the technology sector.
At present, analysts have high expectations for the giant chip manufacturer's financial report on Wednesday, expecting its performance to once again significantly exceed expectations, which may prompt the chip manufacturer to raise its profit guidance. Citigroup stated last week that trading in the options market indicates that investors believe the S&P 500 index may experience a bi-directional 9% fluctuation on the second day after Nvidia's financial report is released.
Step aside, Powell. It's Huang Renxun's turn to drive the market, "said Anthony Saglimbene, chief market strategist at financial services company Amerienterprise Financial, when talking about Nvidia's financial report." In our opinion, Nvidia's financial report this week may actually have a greater impact on the entire market than Powell's speech at Jackson Hole last week
Can the expectation of a soft landing be fulfilled
Of course, in addition to the performance of tech giants such as Nvidia, with the Federal Reserve's interest rate cuts almost certain, investors are expected to further increase their attention to economic data in the coming months to determine whether the "soft landing" argument that drove the US stock market to rise in 2024 can continue. This itself is actually the underlying logical basis of the concept of stock market rotation.
Federal Reserve Chairman Powell said last Friday that the "time has come" to start cutting interest rates - a more dovish message than many investors previously thought they would hear at the Jackson Hole central bank annual meeting. This interest rate cut process may begin next month: the Federal Reserve is expected to cut interest rates by 25 basis points at its September 17-18 meeting.
However, the Fed's statement is far from a clear signal of market trends. The S&P 500 index has risen by 18% so far this year, and its current valuation is also high. Market participants need to continue to see evidence that the economy is sliding towards a soft landing - whether economic growth can still maintain resilience while inflation cools down.
Alessio de Longis, Senior Portfolio Manager and Head of Investment at Invesco Solutions, said, "The market does want to hear news of the start of the rate cut cycle. But is the Federal Reserve actually telling us that they are now concerned about the economy? If so, perhaps the excitement about the rate cut cycle should be viewed from a different perspective
History has shown that if interest rate cuts are made against the backdrop of economic recovery rather than a sharp slowdown, the stock market often performs much better. According to Evercore ISI strategists, since 1970, during non recession periods, the S&P 500 index has climbed an average of 18% a year after its first rate cut. During an economic recession, the index only climbed an average of 2% a year after the first interest rate cut.
More signs of economic weakness may once again shake the stock market and shift the balance of interest rate cuts next month towards the expected 50 basis points.
LPL Financial's Chief Global Strategist Quincy Krosby stated that a key factor in the stock market is whether the interest rate cut is due to a slowdown in inflation or a weak labor market. He pointed out, "The market hopes to launch a rate cut cycle because inflation is declining. But the question remains whether we will see more deterioration in the labor market
If bad news strikes, overvalued stocks may also make investors unwilling to continue holding them. According to LSEG Datastream data, the forward P/E ratio of the S&P 500 index is currently around 21 times, higher than 19.6 times in early August. The long-term average value of this indicator is 15.7 times.
The intense presidential race between current Vice President Harris and former President Trump may also bring ongoing uncertainty between now and the November 5th election.
Andre Bakhos, Managing Director of Ingenium Analytics LLC, said, "Although the long-term trend of stocks is rock solid - any weakness is an opportunity to increase investment positions. But in the short term, we will face... turbulent and unpredictable trends because no one really knows what will happen after he (Powell) exposes himself