US stocks faced significant selling pressure Thursday afternoon, driven by disappointing economic data and a sharp decline in chip stocks. This led to losses across all three major indexes, following the Federal Reserve’s indication of a likely rate cut in September.
The S&P 500 declined nearly 1.5%, and the Nasdaq Composite reversed its earlier gains, falling almost 2.5% after a strong close on Wednesday. The Dow Jones Industrial Average saw a drop of nearly 600 points, or 1.4%.
If this trend continues, it could mark the worst day of the year for the market.
Entering the week, investors were closely monitoring Big Tech earnings.
Microsoft and AMD kicked off the announcements with decent earnings reports.
Despite a slowdown in growth for Microsoft, the company’s commitment to AI spending provided some optimism.
META followed with impressive results, keeping its stock up 5% despite the broader market crash.
However, the tech sector did not perform as poorly as anticipated. So, what is causing the market turmoil?
What’s causing the crash?
The latest economic data released today reignited fears of a recession. Jobless claims surged the most since August last year, compounding concerns when the ISM Manufacturing Index reported a disappointing 46.8%, indicating economic contraction.
This spooked investors, pushing the 10-year Treasury yield below 4%.
Federal Reserve Chair Jerome Powell’s recent announcement that interest rates would remain unchanged, with a potential rate cut in the near future, also contributed to market anxiety. Investors now fear the Fed may have misjudged the economic situation.
Economic data continues to point towards a downturn, if not a full-blown recession. The stock market is in a state of confusion as it grapples with the possibility of three Fed rate cuts this year and 10-year bond yields falling below 4.00%.
“The winds of recession are blowing hard,” said Chris Rupkey, Economist. “The stock market doesn’t know whether to laugh or cry.”
Should investors be worried?
It is challenging to determine whether this situation resembles a recession or the dot-com bubble.
Tech stocks have been pivotal in elevating the market, but their high valuations have always been justified by their performance.
However, there is a growing sentiment that tech stocks cannot sustain their previous year’s momentum indefinitely.
“There is an implicit expectation of lower performance from megacaps now than in 2000,” stated GMO portfolio managers. “In a real sense, the stakes are lower today.”
While high tech valuations are not the primary cause of the current market crash, poor earnings from tech companies could exacerbate the situation. Apple is set to announce its quarterly earnings after market close today, and a disappointing performance could complicate matters further.
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