Stocks closed lower on Friday, signaling a pullback for Wall Street. The S&P 500 dipped 0.6% during afternoon trading, extending its losing streak to nine out of the last 11 days. The index reached its lowest level in five months, down 10% from its peak in July, which technically classifies it as a “correction.” The Dow Jones Industrial Average also experienced a significant decline, falling 339 points or 1%, while the Nasdaq composite managed to edge 0.2% higher.
The recent struggles in the stock market can be attributed to two main factors. First, several prominent Big Tech stocks faltered after releasing their quarterly profit reports for the summer. Additionally, rising Treasury yields in the bond market have put pressure on Wall Street’s performance.
Concerns about the market’s trajectory for the final months of 2023 have arisen as the S&P 500 slumped approximately 4% in October. Quincy Krosby, the chief global strategist for LPL Financial, explained that the market is currently oversold, potentially paving the way for a significant rally. However, whether this rally can carry into the end of the year remains uncertain.
Prominent technology companies like Amazon, Alphabet (Google’s parent company), and Meta (formerly known as Facebook) influenced the stock market’s ascent earlier this year, with their remarkable gains lifting various indexes. Nevertheless, after their latest earnings reports, these companies experienced sharp declines, as the high expectations built around them were not met. Tesla also faced a similar fate.
On the other hand, Intel, a notable technology company outside of the aforementioned “Magnificent Seven,” contributed to supporting the overall market by reporting stronger profit for the summer than analysts had anticipated. However, the performance of Big Tech stocks has been further burdened due to the surge in Treasury yields since the summer. As interest rates on bonds rise, potential investors are presented with more competitive investment options, pressuring the prices of most investments downward. Consequently, stocks deemed expensive or requiring extended periods for substantial growth, particularly in the Big Tech and biotechnology sectors, have been impacted the most.
While concerns about rising inflation persist, the latest reports on the U.S. economy did not significantly alter Wall Street’s expectations for the Federal Reserve’s future decisions on interest rates. Notably, the preferred inflation measure for the Fed remained high, consumer spending exceeded expectations, but income growth fell short. Additionally, consumer expectations for inflation in the coming year rose to 4.2%, raising concerns about a potential detrimental effect on high inflation.
Ultimately, the market has been closely scrutinizing corporate earnings and reacting critically, despite most earnings results meeting expectations. This cautious approach indicates the market’s discerning nature when it comes to rewarding companies.
FAQs
1. What is a correction in the stock market?
A correction in the stock market refers to a decline of 10% or more from a recent peak. It signifies a temporary reversal in the upward trend of a particular index or market.
2. How do rising Treasury yields impact the stock market?
As Treasury yields rise, it becomes more attractive for investors to allocate their funds to fixed-income securities such as bonds, which offer higher interest rates. This shift in investment preference can lead to a decrease in demand for stocks, causing prices to fall.
3. Why are Big Tech stocks particularly affected by rising Treasury yields?
Big Tech stocks are often characterized by high valuations and expectations for future growth. When Treasury yields rise, the perceived value of future cash flows from these stocks becomes relatively less attractive compared to the higher yields available from bonds. Consequently, investors may reallocate their investments towards bonds, leading to a decline in Big Tech stock prices.