As we noted in our News Flash last week, there are signs of a rotation underway as investors start to switch into small caps and industry sectors that have underperformed in 2023 and 2024. The Magnificent Seven stocks that have outperformed during this time came under immense pressure this week, leading to the S&P 500 and Nasdaq indices recording their worst session since December 2022 on Wednesday, with the S&P 500’s longest stretch without a 2% decline since 2007, coming to a halt. While the S&P 500 closed just 1.9% down for the week on Thursday, the numbers signal that Big Tech’s dominance of the US benchmark’s surge of 45% since 1 Jan 2023 may be reaching an end.
Tesla and Alphabet saw their stocks slide on Wednesday and Thursday on the back of disappointing financial results. Meta, Microsoft, and Nvidia all saw their stock prices take a dive, with Nvidia down 4.8% for the week by Thursday’s close. This should, in our view, be regarded as a healthy rebalancing, given that most of these stocks have run very hot for the year to date.
Looking outside the S&P 500 and Nasdaq, of which the Magnificent Seven and tech companies are major components, we continue to see signs of a healthy broadening of the support for equities markets. By the end of Thursday, the Russell 2000 small cap index was up 1.70%. Smithson PLC, our preferred entry point to mid and small cap stocks, had partially recovered from its underperformance to be up 3.90% month-to-date, as measured in US dollars. (Dynasty has exposure to this investment trust in our global house-view funds.)
As we approach the US Presidential election, we are expecting to see volatility increase, especially with economic data sending mixed signals. While there are some signs of weakness in corporate earnings, US GDP growth for the second quarter surprised on the upside, and inflation numbers look encouraging.
We believe this week’s developments took their lead from earnings, macroeconomics, and profit-taking in the tech sector, rather than from the developments in the US presidential race – the drama of the Democrats’ rotation from Joe Biden to Kamala Harris notwithstanding. As the election draws closer, it will start to have clearer impacts on specific sectors. Whereas Donald Trump had a clear gap of 6% over Biden, he now leads Harris by only 1 percentage point, according to a poll conducted by New York Times/Siena College this week. Overall, Trump leads Harris 48% to 47% among likely voters in a head-to-head match.
Given that the S&P 500 is still up 14% for the year-to-date, we would anticipate that the current rotation from tech mega caps into small caps, cyclical sectors and quality stocks will continue, but with some election road bumps along the way. This week’s continued sector rotation underlines the importance for investors not to capitulate on sectors and fund managers that have underperformed in recent years, unless there is a more fundamental reason to do so.
“There’s a changing of the guard happening on Wall Street. The AI stocks that led on the way up are now leading on the way down. During bull markets, you see one sector lead, then it pauses, corrects and passes the baton.”
– Adam Sarhan, CEO of 50 Park Investments
Global News
- A sharp selloff in high-flying technology stocks on Wednesday sent the S&P 500 Index to its worst day since December 2022, ending its best stretch without a 2% decline since the start of the global financial crisis in 2007. On the same day, there was a $1 trillion selloff on the Nasdaq knocking the index about 3.7% lower for its worst day since October 2022. The US equities benchmark slid 2.3% on Wednesday, ending 356 sessions through to Tuesday without a drop of at least 2% – its longest streak in 17 years, according to data compiled by Bloomberg. This comes after the index rose as much as 15% above its 200-day moving average last week – a crucial level that has historically foretold past selloff.
- The global selloff in stocks that began on Wall Street on Wednesday gathered pace on Thursday, as investors pulled back on the AI frenzy. The Stoxx 600 sank more than 1%, French stocks were on the verge of a 10% correction, the FTSE-100 hit a three-month low, while stock index futures were little changed after the S&P 500’s 2.3% slump on Wednesday.
- With Wall Street projecting that profit growth for the tech behemoths is poised to slow, it will be crucial to see whether dip-buyers come back again as more Big Tech firms unveil results in the coming weeks. Investors will continue to get a fresh look with Apple, Microsoft, Amazon, and Meta all set to report next week.
- Harris begins a 103-day sprint for the presidency in a virtual tie with Trump, according to the latest New York Times/Siena College poll, which showed Democrats rallying behind the vice president as the presumptive nominee. Swift reassembling of the Democratic coalition seems to have narrowed the significant advantage Trump had over Biden. Harris had 93 percent support from Democrats in the poll, the same share Trump was getting from Republicans. Her campaign announced on Tuesday morning that it had raised more than $100 million from 1.1 million donors since Sunday afternoon.
- The reduced potential of Trump returning to the White House is causing volatility in the markets, with investors considering whether Biden’s exit from the race boosts the odds of a Democrat victory, and how much they must recalibrate their bets. As a result, there was higher demand for the Swiss franc – a traditional haven asset – as a new week of trading started. US Treasuries, the yen, and gold, also common refuges from volatility, all saw modest increases in demand.
- US economic growth accelerated by more than forecast in the second quarter, gaining at 2.8%, which shows that demand is holding up under the weight of higher borrowing costs. It rose 1.4% in the prior three months. Inflation fell 0.1% in June from the previous month and was up just 3% from the same period a year earlier. Yet, Bloomberg says that the Fed is only likely to start cutting interest rates in September instead of earlier, despite this promising slowdown.
- China has increased support for its economy with surprise interest rate cuts, seeking to prop up growth after a lack of short-term stimulus from a major Communist Party meeting disappointed investors. The People’s Bank of China on Monday cut the seven-day reverse repo rate, a key short-term policy rate, in the first reduction in almost a year. Chinese banks followed the move about an hour later by lowering their main benchmark lending rates, making it less costly to borrow for mortgages and other loans.
- Last week’s global tech outage that was related to a software update by cybersecurity firm CrowdStrike affected nearly 8.5 million Microsoft devices, Microsoft said in a weekend blog post. A software update by one of the largest operators in the industry triggered systems problems that grounded flights, forced broadcasters off air, and left customers without access to services such as healthcare or banking. Microsoft said the broad economic and societal impacts reflect the use of CrowdStrike by enterprises that run many critical services.
- Tesla stock dropped more than 12% on Wednesday after it reported mixed second quarter results late on Tuesday that revealed growth this year would be “notably lower” than what it saw in 2023. Revenue, however, beat expectations at $25.05 billion. Tesla said it remains on track to produce new vehicles, likely including a cheaper EV, in the first half of next year.
- Alphabet stock slid 5% on Wednesday afternoon trade as investors digested second quarter results that beat earnings estimates but fell short in other key areas. Earnings per share were $1.89 versus estimates of $1.85. Yet, ad revenue from YouTube was weaker than Wall Street expected, at $8.66 billion versus estimates of $8.95 billion. Goldman Sachs analysts say they remain optimistic about the company’s AI opportunities.
- Cybersecurity startup Wiz has said no to a takeover bid of as much as $23 billion from Google, sticking instead with a plan for an initial public offering. The rejection will come as a blow to Google, which is trying to catch up with Microsoft and Amazon.com in an intensely competitive cloud services market.
- Facebook parent company Meta Platforms debuted a new and powerful AI model that CEO Mark Zuckerberg called “state of the art” and said will rival similar offerings from competitors like OpenAI and Alphabet’s Google. The new model released on Tuesday, called Llama 3.1, took several months to train and hundreds of millions of dollars of computing power. The company said it represents a major update from Llama 3, which came out in April.
- Novo Nordisk weight-loss shot Wegovy gained expanded clearance as a heart drug in the UK, as the country’s regulators followed the US in broadening the use of the blockbuster medicine. UK doctors will be able to prescribe the medicine to prevent heart attacks or strokes in people who already have heart disease and are overweight or obese, the Medicines and Healthcare products Regulatory Agency said on Tuesday. The shares gained 1.5% at the close of trading in Copenhagen. They’ve gained 32% this year.
- As at Thursday’s close the S&P 500 was 1.92% down for the week.
Local News
- The JSE/ALSI was weaker on Thursday morning as it joined global markets in tracking Wednesday’s weaker US close after disappointing corporate earnings reports by major tech companies sparked a sell-off, as reported above. It however regained some momentum later on the day.
- Economists and analysts agree the re-election of Trump as US president would pose challenges for South Africa’s diplomatic and trade fortunes. A second Trump presidency would cause an even stronger push for protectionism in the US. Trump’s “isolationist” economic policies would present a particular challenge for South Africa because it supports BRICS, which is now made up of Brazil, Russia, India, China, SA, Iran, Egypt, Ethiopia, and the United Arab Emirates.
- Government is pushing to retain its status as a beneficiary of the African Growth and Opportunity Act (AGOA), with Trade, Industry and Competition Minister Parks Tau saying that early and long-term reauthorisation of the US legislation will provide policy certainty for investors and spur industrialisation on the continent. Tau’s comments echoed US President Joe Biden’s earlier call on Wednesday, the first day of a forum being held in Washington, to extend the legislation beyond 2025 when it is due to expire.
- The Gauteng Division of the High Court has dealt a blow to the proposed National Health Insurance Act by ruling that the requirement for doctors and health practitioners to obtain a ‘certificate of need’ before being allowed to practice in a particular area is unconstitutional. The requirement has been described as a cornerstone of the proposed National Health Insurance. The application was brought by the trade union Solidarity, the Alliance of South African Independent Practitioners Associations, the South African Private Practitioner Forum, the Hospital Association of South Africa, and a group of doctors in private practice.
- Action SA founder and leader Herman Mashaba, the man who has maintained a virulently anti-ANC stance, turned pragmatic this week by striking a deal with his avowed rival – in the interests, he says, of breaking the destructive stalemate in Johannesburg, the country’s largest and richest city. He is planning to work with the ANC by taking over the legislature, the speaker, and all the positions to hold the speaker accountable.
- Inflation fell slightly in June, from 5.2% to 5.1%, touching a six-month low as food costs come down. This figure is in line with a consensus from a Bloomberg poll. Forecasts from economists broadly favour a gradual slowdown in the headline inflation rate over the coming months after remaining unchanged at 5.2% year on year in May. Markets have already started factoring in a higher likelihood that the central bank will commence its interest rate cutting cycle in September, with an 80% expectation of a 25bps cut then.
- The South African Reserve Bank has seized more than R6 billion from different accounts of Ibex Investments, formerly Steinhoff, over contraventions of exchange control regulation according to news that was released last Friday. Funds have been frozen as it conducts its investigations into the company’s cross-border transactions.
- The outcome of the elections, which produced a government of national unity, as well as the improved energy supply has been a major boost for the share prices of South Africa’s largest banks, which have added about R180 billion in value in the past two months. Since May 30, when the election results were confirmed, the JSE’s banking index has added 18.88%. Leading the gains was Capitec, up 26%, followed by FirstRand 21%, Standard 20%, Nedbank 10% and Absa 8%. Notwithstanding, our research shows that the banking index has returned a mere 6% (ex-dividends) per annum over the past 10 years, reflective of SA’s poor economic growth.
- Fast-fashion giant Shein, known for its $5 tops and $10 dresses, will open a pop-up store in Johannesburg in August as the online retailer aims to expand its brand recognition in the country. The company and rival Temu aggressively expanded worldwide as online shopping surged after the COVID-19 pandemic. This pop-up store, which is part of a growth strategy, follows the entry of Amazon.co.za into the country.
- As at the time of writing the rand was 0.1% stronger and the ALSI was 1.47% up for the week.
Sources: Dynasty, Bloomberg, Daily Maverick, BusinessLIVE, Reuters, Markets Insider, BizNews.com, News24, etc
