Tech Stocks Falter as Strong Jobs Report Raises Economic Concerns

Tech stocks are 'one bad payroll away' from losing their dominance, BofA says

The strategist -- who is bullish on bonds for the second half of 2024 -- has said signs of an economic slowdown would fuel a rotation into stocks that have lagged behind the pricey tech mega-caps this year. In a note on Friday, Hartnett said recent data suggested the global economy was "ill," and that "we are one bad payroll away" from big tech stocks losing their dominance. The upward trajectory of technology stocks including Apple Inc., Amazon.com Inc., Alphabet Inc., Microsoft Corp., Nvidia Corp. and Meta Platforms Inc. has been derailed in the past two weeks as investors flocked into small caps on bets that the Federal Reserve could begin cutting rates soon. About $2.6 trillion has been erased from the market capitalization of firms in the tech-heavy Nasdaq 100 Index since it hit a record on July 10, also fueled by worries that big investments in artificial intelligence may not pay off any time soon. Still, BofA's Hartnett said equity bulls were holding on to the belief that a correction was "healthy" as the market hadn't fallen below critical levels. The Nasdaq 100 has dropped about 9% since July 10, but it's still up more than 30% since hitting a low in October 2023. US equity futures advanced on Friday, putting them on track to recoup some losses. The bank's custom bull-and-bear indicator edged up to 6.9 in the week through July 24 to the highest in over three years. A reading above 8 would flash a contrarian sell signal -- which could be triggered if fund managers' equity allocations rise and cash levels decline further, and a rally in the laggards leads to an improvement in market breadth, Hartnett said.

Bears see Mag 7's S&P dominance as 'one bad payroll away from cracking': Bank of America

The significant sway the Magnificent 7 mega-cap tech stocks have on the S&P 500 (SP500) could rupture from a marked slowdown in U.S. economic activity, according to Bank of America ((BofA)). The Nasdaq-100 (NDX) and other tech-stock gauges (COMP:IND) (QQQ) have veered lower this month as investors drive into small-caps (RTY) and other overlooked sectors of the market, spurred by revived expectations for up to three rate cuts this year and technical influences. The Nasdaq-100 (NDX) has dropped nearly 4% in July. Market bulls say the "correction" is healthy, but bears say the market is "one bad payroll away from cracking" the "monopolistic/oligopolistic dominance" of the Magnificent 7 on the S&P 500 (SP500)(SPY)(VOO), Michael Hartnett, Bank of America investment strategist, said in the firm's Flow Show note Friday. He shared this chart of the Mag 7's high, +30% concentration on the broad-market index: Hartnett said bears see a recessionary sign in the steepening of the 2-year/10-year (US2Y) (US10Y) U.S. Treasury yield curve. More broadly, they see sagging commodity prices (CL1:COM) (HG1:COM) confirming an "ill" global economy, expressed through Chinese bond yields hitting all-time lows, he said. Hartnett has previously said U.S. bonds are likely to rally in the second half of 2024 on signs economic activity could be moving toward a contraction. This week, disappointing financial updates from Mag 7 constituents Tesla (NASDAQ:TSLA) and Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) stirred up questions about the rally surrounding corporate AI investment that's pushed the S&P 500 (SP500) and the Nasdaq Composite (COMP:IND) sharply higher this year. Meanwhile, economists are monitoring a slowing pace of U.S. labor-market growth and an uptick in the unemployment rate. June's unemployment rate rose to 4.1%, the highest since November 2021. This month's selloff in shares of Mag 7 companies - Amazon (NASDAQ:AMZN), Alphabet (GOOG)(GOOGL), Apple (NASDAQ:AAPL), Meta (NASDAQ:META), Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), and Tesla (TSLA) - have contributed to the Nasdaq-100 (NDX) eating into its double-digit YTD gain. But the index still holds a +23% advance over the past year. Market bulls say the correction is healthy, pointing to credit spreads being "well-behaved" and "big levels" holding in various markets. Among them, the Nasdaq-100 (NDX) is above 18,700 and London copper prices are above $9,142 a metric ton. More on the markets Dow, S&P, Nasdaq climb with tech recovering, PCE inflation supporting rate-cut views There Is No Bubble Bursting Is The Dramatic Yen Short Squeeze Over? SPX 500: Further Weakness May Trigger A Medium-Term Global Risk-Off Event This DB chart shows how the tech selloff is driving moves throughout the stock market