Stocks could fall further as rates rise and Big Tech drags the market
Strategists see more sales to come after the stock sells on Tuesday, dragged down by big-cap tech and growth names.
A sharp rise in interest rates over the past few sessions has stung the market, especially the names of growth. At its highest on Tuesday, the benchmark 10-year Treasury yield had climbed to 1.56%, about a quarter of a percentage point since the Federal Reserve meeting last Wednesday.
The S&P 500 ended the session down 2% and the Nasdaq lost 2.8% due to the high concentration of tech names in the index. Ten of the 11 sectors of the S&P 500 were down, with technology losing 2.9%. Energy was the only one to progress, gaining 0.4%
“We are seeing a decrease in the spread which is largely due to mega caps, which are down 2% to 5% right now,” said Fairlead Strategies founder Katie Stockton, highlighting Apple’s cuts, Amazon, Facebook, Nvidia and Microsoft.
These names are “clearly the biggest drag on the stock market,” she said. “Because they are the biggest, it shakes the sentiment.”
Stockton said those stocks, plus Tesla, make up about 25% of the S&P 500.
“Keep an eye out for the momentum behind them,” she said. “Just their footprint alone creates a problem. When they do that, it affects the sentiment. People have relied on Google and Microsoft to never fall. Now they are faced with reality.”
Stockton added that she was watching a bearish target of 4,238 on the S&P 500, an old support level. The S&P 500 closed Tuesday’s session at 4,352.63.
CFRA chief investment strategist Sam Stovall said he expected a massive sell-off. He also noted that the S&P 500 could test 4,128, its 200-day moving average. Stovall said a drop to that level would put it more than 5% below current levels and around 10% from peak to trough.
The S&P 500 was below its 50-day moving average on Tuesday, having recovered and rallied above it late last week. The 50-day deadline was significantly exceeded last week. The 50 Day is an average of the last 50 closes, and it is considered an indicator of negative momentum when the index falls below.
Stovall said it was important for large cap stocks to lead to the downside.
“If the generals start getting shot, it’s a sign that everyone is vulnerable, so it looks like with tech down 2.5% and interest rates higher, I think ‘There is even more downside potential, “Stovall said.
Big names in tech and growth are sensitive to higher rates because their high valuations are based on future growth and cash flow. When interest rates rise, the value of these future cash flows is discounted.
But Oppenheimer’s technical analyst Ari Wald said the fact that Big Tech is selling means that these popular large-cap growth stocks are joining the many other stocks that have already seen steep declines.
“It hadn’t spilled over into the large caps and now it is. We see this as a sign of capitulation,” he said. Wald added that he saw more downsides to the July S&P 500 low of around 4,230.
Stovall said it looks like any correction will be contained and will not turn into a bear market. “Unless our forecast for earnings, GDP and interest rates, I don’t think it goes beyond a correction,” he said.