Stocks endured another slightly bearish session this morning, extending their downward trend that started with yesterday’s plunge. Traders grappled with soaring yields and mulled over even more earnings data.
The S&P retreated 0.3% while the Nasdaq Composite managed to trade flat through noon. The Dow slipped 95 points, measuring a 0.3% drop.
Bulls felt the heat as the 10-year Treasury yield inched upwards to about 4.1%, its highest level since November 2022, triggering a 2% decline in the real estate sector. Meanwhile, the CBOE Volatility Index surged to a peek unseen since June.
“Momentum has been quietly eroding over the last few weeks and was the motivation for our correction hunch a few weeks back,” commented Chris Verrone, Strategas’ head of technical and macro research.
“Experience reminds us that such episodes usually work in a three-step process… break, tepid rally, break again,” he explained, though he also anticipates the longer-term trend to remain bullish.
Chipmaker Qualcomm tumbled by 10% today after it fell short of third-quarter revenue expectations and unveiled disappointing guidance in its earnings call. Meanwhile, PayPal took an 11% hit due to a decline in the company’s number of active accounts. Moderna registered a 1.5% gain, buoyed by an upgraded Covid vaccine outlook.
But the real fireworks come this evening when tech titans Apple and Amazon report quarterly results, shortly after the market closes. To date, close to 79% of S&P 500 companies have released their quarterly reports, with 82% surpassing expectations.
Yesterday’s turbulence was triggered not by earnings, but the US government announcing that it would issue more debt than anticipated, causing a sudden nosedive in Treasurys and a spike in yields.
Today, Wall Street processed the latest economic indicators, including weekly jobless claims and second-quarter productivity data that indicated an upward trend. However, disappointing ISM Services and PMI Services data points revealed a slowdown, despite recent positive surprises in US Macro data.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, provided his analysis:
“The service sector remains the main engine of growth in the US economy, though there are signs of the motor spluttering amid rising headwinds.” He attributed the slowdown in business activity and growth of new business to increased living costs and higher interest rates, leading to a decrease in domestic customer demand.
“Reflecting concerns that the upturn is faltering, companies have become much less optimistic about the outlook and reined in their hiring as a result,” Williamson added.
Elevated inflationary pressures in July, especially in the service sector, remain a point of concern, largely attributed to wage increases.
As the weakening service sector expansion is coupled with a near-stalled manufacturing sector, the overall message from the surveys is a slowing down of economic growth at the start of the third quarter.
Closing his comments on a less optimistic note, Williamson pointed to a lingering inflation rate around 3% as indicated by the survey’s price gauges.
“Such a wage-led stickiness of inflation in the vast service sector will naturally worry policymakers,” he said, suggesting the possibility of a stagflation scenario.
Tomorrow’s July jobs report could provide more clarity on the economic situation in the US. But given that stocks – and tech, in particular – plummeted yesterday in response to soaring yields, Apple and Amazon earnings should steal the show, which could be either a net bullish or bearish impulse for the market depending on their quarterly results.