The S&P 500 suffered its worst weekly performance since April, but it’s important to put that decline in proper context, because last week’s losses were almost entirely due to tech weakness and, importantly, not due to some significant worsening of the current market environment. As we have been saying for months, the historic 2024 rally has been driven by this bullish mantra: Stable growth, looming Fed rate cuts, falling inflation and AI enthusiasm.
Last week, economic growth was better than expected and pushed back against the narrative of a slowing U.S. economy. So, growth was solid. Also last week, Fed officials reinforced that the U.S. economy was close to a place where the Fed could cut interest rate. Those comments came from important Fed officials (Powell and Williams). So, there are still looming Fed rate cuts.
Inflation data (if we consider earnings commentary and macroeconomic data) showed a continued (albeit modest) decline. So, inflation is still falling. Point being, three of the four parts of the bullish argument for this market saw their cases strengthened, not undermined. The exception, of course, was AI enthusiasm, as the Nasdaq suffered the worst week since April as it was dragged down by the previously high-flying semiconductor stocks (the semiconductor ETF, SOXX, dropped 9% last week).
Importantly, it wasn’t because of any real, significantly negative news. Yes, earnings were mixed in the semi-space last week as ASML posted underwhelming guidance. But Taiwan Semi (TSM) posted strong earnings and guidance, so it’s not that there were major negatives. Additionally, markets did have to consider future trade volatility if there is a Trump presidency next year. But we also have to remember that many of the fears of Trump’s unorthodox economic policies in his first administration never actually materialized.
So, here’s the net result of last week’s news: Yes, the S&P 500 declined moderately but it was due to tech weakness, not some major, negative macroeconomic shift. The point here is what’s happening now is the partial unwinding of the tech melt up that carried the S&P 500 higher and it’s not that surprising. The tech melt-up was always unsustainable. That doesn't mean AI isn’t amazing but it was the pace of the acceleration—it just can’t last. And now it’s reversing itself and we are seeing that extended part of the market come in, while more traditional sectors are narrowing the unsustainably large performance gap.
What happened in the market last week was not some material, negative shift. It was, instead, the natural (and appropriate) unwinding of a tech sector that was always unsustainable. That said, if the decline in tech accelerates, it can become such a strong vortex that it pulls down other, healthy parts of the market. But that’s likely a short-term phenomenon.
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