Why US Stocks Fell: Here’s Everything You Need to Know

The US stock market has been on a rollercoaster ride recently, with significant fluctuations driven by a combination of economic, geopolitical, and corporate factors. Over the past year, the market has navigated through periods of strong performance led by tech giants, unexpected sell-offs following key policy announcements, and waves of volatility induced by various macroeconomic indicators. This article delves into the major events and trends that have shaped the market landscape, providing insights into what might lie ahead for investors.

Tech-Led Market Performance

Despite a global environment of higher interest rates, the US stock market, especially the tech sector, has shown remarkable performance. Major tech companies have driven the market to new highs, primarily due to their lower exposure to leverage, robust earnings, and investor excitement about their growth potential, particularly in areas like artificial intelligence (AI). For instance, tech stocks, including giants like Nvidia and AMD, surged significantly, reflecting investor confidence in their long-term growth prospects. (Morningstar) (Reuters).

Post-Fed Meeting Tech Sell-Off

Following the Federal Reserve’s meeting and the Federal Open Market Committee (FOMC) announcement, tech stocks experienced a substantial sell-off. The market reacted to hints that interest rate cuts might be on the agenda for the Fed’s September meeting. This potential policy shift prompted investors to book profits in large-cap tech stocks and shift their focus to smaller-cap stocks, which had been struggling under the high-interest rate environment. (Business Insider Markets) (Investopedia).

Disappointing Earnings Reports

As earnings season unfolded, several big tech companies reported results that fell short of investor expectations. Alphabet’s (Google) earnings raised concerns about the return on high capital expenditures in AI, which set a negative tone for the sector. Amazon and Microsoft also reported issues, with Amazon citing slower growth in its cloud services and Microsoft experiencing lower-than-expected demand for some of its software products. Tesla faced production challenges and supply chain issues, contributing to investor dissatisfaction. ( ).

CrowdStrike Incident

In a separate incident, CrowdStrike’s latest software update encountered a critical bug that led to the shutdown of millions of PCs, causing widespread operational disruptions across various sectors, including airlines and healthcare. Although the issue was not directly related to Microsoft, the majority of affected PCs were running Windows, leading to a minor hit to Microsoft’s stock due to the association. ( Business Insider Markets ).

US Jobs Report and Market Reaction

The release of the US jobs report, which showed higher-than-expected unemployment levels, triggered a significant market sell-off. Investors feared that the economic slowdown might be more severe than anticipated, leading to reduced consumer and business confidence. This, combined with Japan’s unexpected interest rate hike — the first in 15 years, which strengthened the Japanese yen (JPY) — added further volatility to the markets. (Reuters) (Investopedia).

Increased Market Volatility

The volatility index (VIX) reached 65 points, a level not seen since the COVID-19 pandemic, and the Fear & Greed Index hit 19, indicating extreme fear among investors. This heightened volatility reflects the market’s reaction to a combination of economic, technical, geopolitical, and political factors.

1. Growth Scares (Fear of Recession): Investors are increasingly worried about a potential recession, particularly after the recent jobs data indicated a slowing economy.
2. Policy Mistakes Concerns (Fed behind the curve): There is growing apprehension that the Federal Reserve may be lagging in its policy responses, potentially exacerbating the economic slowdown.
3. Bad Technicals (JPY, Trades Winding Off): The rate hike in Japan and the strengthening of the JPY may have triggered the unwinding of trades, adding technical pressure on the markets.
4. Geo-Political Concerns (ME, War, etc.): Geopolitical tensions, including conflicts in the Middle East, are contributing to market uncertainty.
5. Domestic Politics (Trump or Harris): The upcoming US presidential election adds another layer of uncertainty, affecting investor sentiment.

Positive Impact of Latest US Services Data

The recent release of strong US services data provided a much-needed boost to the stock market, helping to mitigate some recession fears. The services sector, which is a significant component of the US economy, showed robust growth, leading to a recovery in stock prices. Investors viewed this data positively, as it indicated continued economic strength despite other challenges. This positive sentiment helped to stabilize the market and provided a more optimistic outlook for the near term, suggesting that the economy might avoid a severe downturn (Morningstar) (Morningstar).

Future Market Outlook

Looking ahead, the US stock market is expected to face continued volatility. Analysts predict that small-cap and value stocks might shine as investors rotate away from overvalued tech stocks. The Federal Reserve’s potential interest rate cuts in September are a focal point, with market sentiment hinging on their decision. While some scenarios suggest a mild stabilization, others foresee a continued decline if key support levels are breached. Overall, the market is likely to experience a complex interplay of economic, technical, geopolitical, and political factors, making the outlook highly uncertain ( Morningstar ) ( ) ( Morningstar ) ( Morningstar ). See It Market

Investors should remain cautious and stay informed about ongoing developments, balancing their portfolios to manage risk effectively in this unpredictable environment.

Originally published at https://www.linkedin.com.