This is a question on the minds of many market strategists. What caused this top-tier stock market to collapse?
One longtime equity derivatives strategist thinks so. In his latest note to clients, Nomura’s Charlie McElligott discussed two things that could cause a decline in the megacap technology stocks that have driven much of the S&P 500’s year-to-date rally. .
The most pressing concern for market-leading technology companies is the potential for Nvidia to miss out on revenue, he said. The company is scheduled to report quarterly results on February 21, according to FactSet.
Analysts surveyed by FactSet expect the semiconductor maker and artificial intelligence darling to post earnings of $4.53 per share in the final three months of 2023. Earnings per share in the same period last year were 88 cents.
nvidia stock
NVDA
The company is up 35% since the start of 2024, establishing the semiconductor maker as the best-performing stock on the S&P 500 index, according to FactSet data. The second best performing company on the index is Meta Platforms Inc.
Meta
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The company is another member of the Magnificent Seven group of megacap tech stocks that have driven much of the S&P 500’s 3.7% rise so far this year, according to FactSet data.
Beyond that, bigger threats to 2024 stocks could arrive in the coming months as economic data shows signs of reflation. Virtually the entire investment community has completely given up on the prospect of an inflation recovery, McElligott said.
But as many investors learned last year when the ubiquitous recession predictions failed to materialize, just because few expected something to happen on Wall Street… That doesn’t mean it won’t happen.
Instead, McElligott believes that Fed policymakers could allow the U.S. economy to “overheat,” leading to a resurgence of “animal spirits” and associated inflation.
McElligott doesn’t think this is very likely to happen in the near future, but if the positive year-on-year comparisons in commodity prices fade, it could happen in the coming months. Economists and investors will be competing with more sticky services. inflation.
Such a resurgence is likely to trigger a “brutal equity theme reversal,” with crowded bets on biggest growth stocks easing as expectations for higher interest rates and U.S. Treasury yields cause sharp contraction in valuation multiples. There is a possibility that
Mr. McElligott noted that consumer price inflation has declined to 1.9%, based on the past six-month annualized reading of the Core Personal Consumption Expenditure Price Index. The PCE index is the Fed’s preferred inflation measure, and the central bank’s official goal calls for inflation to return to 2% year-over-year.
But there’s still a good chance things could “go crazy” later, McElligott noted.
Shares of semiconductor maker NVIDIA fell 3.5%, weighing on the S&P 500 and Nasdaq Composite Index on Tuesday as the company’s stock posted its biggest decline since October, according to Dow Jones Market Data. . But the company’s stock weakness has been offset by strong gains in materials, real estate and health care stocks, according to FactSet data.
As a result, the S&P 500 SPX was flat, but the Nasdaq Composite Index fell 0.3% to 15,556 points, and the Dow Jones Industrial Average DJIA rose 60 points (0.2%) to 38,445 points.
According to strategists at LPL Financial, the only four stocks are Nvidia, Meta, and Microsoft.
MSFT
and Amazon.com Inc.
AMZN
— drove nearly 75% of the S&P 500’s total return in 2024.