Market Recap 4/19/2024: Stocks Slide as Earnings Disappoint and Inflation Persists

U.S. stocks closed lower for the second consecutive week as disappointing corporate earnings and stubbornly high inflation weighed on sentiment. The tech-heavy Nasdaq Composite bore the brunt of the selling, tumbling 3.5% as investors fled growth stocks. The Dow Jones Industrial Average and S&P 500 also retreated, shedding 1.2% and 1.8%, respectively.

Key Takeaways

• Nasdaq plummets 3.5% as tech sector selloff intensifies
• Dow slips 1.2% to 37,525.42, S&P 500 falls 1.8% to 5,031.56
• Nvidia shares plunge 10% on worst day since 2020
• Netflix subscriber gain overshadowed by weak revenue outlook
• March CPI rises more than expected for the third straight month
• Middle East tensions boost oil prices but fail to lift energy stocks

Earnings Jitters Rattle Tech Sector

The technology sector led the market lower last week as a string of disappointing earnings reports sparked fears of slowing growth and compressed margins. Nvidia, the poster child for the AI boom, saw its shares plummet 10% after the chipmaker warned that data center demand was cooling. The selloff, Nvidia’s worst in four years, reverberated across the semiconductor industry.

Netflix was another high-profile casualty, with shares falling despite a surge in new subscribers. Investors focused instead on the streaming giant’s tepid revenue forecast, which underscored the intensifying competition in the industry.

The tech route spread to other corners of the market, with the communication services and consumer discretionary sectors also posting steep losses. The selloff suggests that investors are reassessing the lofty valuations of growth stocks in the face of rising interest rates and slowing economic momentum.

Inflation Picture Darkens

Adding to the market’s woes, the March Consumer Price Index (CPI) came in hotter than expected for the third month in a row, signaling that inflationary pressures remain entrenched. Core CPI, which strips out volatile food and energy prices, rose 0.4% from February, above the 0.3% consensus estimate.

The stubborn inflation readings dealt a blow to hopes that the Federal Reserve might pause its rate-hiking campaign in the near term. With price pressures proving stickier than anticipated, investors are now bracing for the possibility of additional rate increases and a longer path to policy normalization.

The inflation jitters were evident in the bond market, where yields climbed across the curve. The benchmark 10-year U.S. Treasury yield briefly touched 4%, its highest level in over a month, as investors priced in a more hawkish Fed.

Geopolitical Tensions Simmer

Geopolitical tensions also remained in focus, with the ongoing conflict in the Middle East sparking volatility in energy markets. Oil prices climbed to multi-week highs as fears of supply disruptions mounted, but the gains were short-lived as demand concerns resurfaced.

The uncertainty weighed on energy stocks, which failed to capitalize on the crude rally. The sector was one of the few bright spots in an otherwise bleak week, with utilities and healthcare also outperforming thanks to their defensive characteristics.

The choppy market conditions have prompted many hedge funds to adopt a more defensive stance, with managers increasing their short positions and rotating into sectors that are less sensitive to economic fluctuations.

According to a recent report from Goldman Sachs, hedge funds have been particularly active in shorting consumer discretionary and technology stocks, reflecting concerns about lofty valuations and slowing growth. The shift underscores the growing unease among sophisticated investors as the bull market shows signs of fatigue.

At the same time, hedge funds have been increasing their exposure to healthcare and utilities, which are seen as more resilient in the face of economic headwinds. The move suggests that managers are bracing for a potential downturn and seeking to protect their portfolios from further volatility.

Conservative Investors

With market volatility on the rise and economic uncertainties mounting, conservative investors should focus on quality and stability. Look for companies with strong balance sheets, consistent cash flows, and recession-resistant business models. Dividend aristocrats and low-volatility ETFs can provide downside protection in a choppy market.

Growth Investors

Growth investors may need to be more selective in the current environment, as rising rates and slowing economic momentum weigh on multiple stocks. Focus on companies with robust fundamentals and clear competitive advantages in industries with long-term secular tailwinds. Be prepared to weather near-term volatility as the market digests the shifting landscape.

Opportunistic Investors

For opportunistic investors, the recent market pullback may present attractive entry points in oversold sectors and individual names. Keep an eye out for stocks with strong fundamentals that have been unduly punished by indiscriminate selling. Geopolitical developments and policy shifts may also create short-term trading opportunities, but be sure to manage risk carefully.

Our Take: Buckle Up for a Bumpy Ride

The confluence of disappointing earnings, sticky inflation, and geopolitical tensions has created a perfect storm for investors. With the market’s volatility gauges spiking and key support levels being tested, we believe that further turbulence lies ahead.

The tech sector’s stumbles are particularly worrisome, as they suggest that even the most resilient corner of the market is not immune to the forces of gravity. With valuations still stretched by historical standards and the Fed poised to keep rates higher for longer, investors may need to recalibrate their expectations for growth stocks.

At the same time, the inflation picture remains murky, with recent data suggesting that the road to price stability may be longer and bumpier than hoped. If inflationary pressures continue to prove more persistent than anticipated, the Fed may have no choice but to tighten policy more aggressively, raising the risk of a recession.

Given these crosscurrents, we believe that investors should prioritize resilience and adaptability in their portfolios. Companies with pricing power, healthy balance sheets, and diversified revenue streams are likely to weather the storm better than their more speculative counterparts. Diversification across sectors, styles, and geographies is also key, as it can help mitigate the impact of any one risk factor.

The week ahead brings a deluge of corporate earnings reports that will provide fresh insights into the health of the economy and the durability of corporate profits. Tech giants like Apple, Amazon, and Microsoft are among the headliners, with their results and outlooks likely to set the tone for the broader market.

On the economic front, the first reading of first-quarter GDP will be closely watched for signs of slowing growth, while the PCE price index – the Fed’s preferred inflation gauge – will offer clues on the trajectory of price pressures.

Geopolitical developments also warrant close attention, with any escalation in tensions or unexpected policy shifts having the potential to roil markets. Investors should stay nimble and prepared to adjust their portfolios as conditions evolve.

 

Views expressed here should not be considered personal investment advice.

Sources:

S&P

Investopedia

Factset

Reuters