Stocks have recently faced a broader and more intense decline, with the S&P 500 falling 4.14% from its all-time high last Tuesday.
Contrary to some analysts’ views that this pullback signals future economic growth concerns or political issues, Sevens Research attributes the downturn to more mundane factors: positioning and earnings.
According to Sevens Research, a positive CPI report two weeks ago made a September rate cut seem certain to investors. This led to a rotation out of mega-cap tech stocks and into more cyclically oriented sectors like small caps, industrials, financials, and value stocks.
The firm says that while this shift negatively impacted the tech-heavy S&P 500, it was either neutral or beneficial for other market sectors, evidenced by the Russell 2000‘s 11% surge over five trading days.
However, they note that attempts to stabilize the market on Monday were short-lived due to disappointing tech earnings. ASML (AS:ASML), followed by Google (NASDAQ:GOOGL) and Tesla (NASDAQ:TSLA), missed earnings estimates, adding selling pressure to an already strained tech sector.
The combined effect of tech underperformance and neutral earnings from other sectors intensified the market’s decline, according to Sevens.
The investment research firm emphasizes that this pullback is not driven by major macroeconomic concerns but by a correction in the overextended tech sector and lackluster earnings.
They highlight the importance of solid earnings to potentially end this pullback and stress the need to monitor growth worries, as these could escalate the situation from a mere pullback to something more severe. For now, Sevens feels it remains a positioning and earnings-driven downturn, with the tech sector’s stability being key to market recovery.
