The S&P 500 index experienced a significant decline of 1.2% on Thursday, putting it on track for its third consecutive day of losses. This downturn signals a shift in investor sentiment, with a notable rotation away from technology stocks and towards sectors poised to benefit from a strengthening U.S. economy. The Nasdaq Composite followed suit, shedding 1.7%, while the Dow Jones Industrial Average saw a decrease of 555 points, or 1.1%.
Rotation to Cyclical Sectors and Pressure on Tech Giants
During the trading session, investors demonstrated a clear preference for more cyclical areas of the market. Companies like Walmart and Boeing saw their shares rise by 3% and 2% respectively, reflecting this trend. Conversely, technology stocks faced considerable pressure. Major tech players, often referred to as the "Magnificent Seven," such as Apple and Amazon, each experienced declines of around 3%.
AI Fears Continue to Haunt Software Stocks
Within the technology sector, software stocks continued to bear the brunt of the sell-off. This ongoing weakness is attributed to persistent concerns surrounding the disruptive potential of artificial intelligence (AI) on the software landscape, which has unnerved Wall Street in recent weeks. Key AI-focused companies like Palantir Technologies saw their shares fall by more than 6%, while Oracle experienced a decline of over 2%. Salesforce was down by more than 1%, and the iShares Expanded Tech-Software Sector ETF (IGV) dropped 3%, now trading approximately 32% below its recent peak. Adding to the sector’s woes, Cisco Systems slid 11% after issuing disappointing guidance for the current quarter, impacting its networking hardware business.
Resilient Economy Fuels Investor Confidence in Cyclical Sectors
Investment strategists believe that this rotation is largely driven by the resilience of the U.S. economy. Ross Mayfield, investment strategist at Baird, commented that the capital flowing out of software is finding attractive opportunities in other sectors, including machinery, financials, and energy. This indicates a broader economic optimism that is guiding investment decisions.
Strong Jobs Report and its Implications for Fed Policy
The market’s performance on Thursday followed a volatile previous session. Stocks initially rallied on the back of a robust jobs report released earlier in the week. The report indicated strong job growth of 130,000 in January, significantly exceeding economists’ expectations and showing a substantial increase from the revised December figures. The unemployment rate also saw a slight decrease, falling to 4.3% from 4.4%. This positive labor market data provided a welcome reprieve for investors who had been concerned about signs of a weakening economy.
However, the strength of the jobs report also introduces complexity for the Federal Reserve’s interest rate outlook. A strong labor market might lead to fewer anticipated interest rate cuts, especially if inflation remains a concern. This underscores the importance of upcoming economic data, particularly Friday’s consumer price index (CPI) report, which will provide crucial insights into the inflation situation and help the central bank balance its dual mandate.
Anticipation for Friday’s CPI Data
Investors are now keenly awaiting Friday’s inflation data. Economists surveyed by Dow Jones anticipate that the January CPI will show a 0.3% increase for both the headline figure and the core rate (excluding food and energy prices). Mayfield noted that while the strong jobs number might allow the Fed to maintain a pause on rate cuts for a substantial period, a "hot" CPI report would require closer monitoring of trends before the Fed makes definitive policy decisions. Conversely, a weaker-than-expected CPI could signal a risk-on environment for equities, although a significant upside surprise would be needed to substantially impact equity markets and Fed fund futures.
Initial Jobless Claims Show Slight Dip, Still Above Expectations
In other economic news, initial jobless claims for the week ended February 7th showed a slight decrease from the previous week, according to the Labor Department. However, the figure remained slightly above expectations.
Morgan Stanley Defends AppLovin Amid Software Sell-off
Despite the broader software sell-off, Morgan Stanley has reiterated its bullish stance on AppLovin, a mobile advertising company. Following higher-than-expected earnings and guidance released on Wednesday, the bank maintained its "overweight" rating on AppLovin, while adjusting its price target to $720 from $800. Analysts highlighted AppLovin’s strong advertising revenue growth, which exceeded its target. Despite these positive fundamentals and analyst reactions, AppLovin shares experienced a significant drop of 18% on Thursday morning, caught in the broader software sector downturn driven by AI-related anxieties.
Bitcoin Faces Potential Further Losses, According to Wolfe Research
Bitcoin, the leading cryptocurrency, has experienced a significant drawdown, falling over 50% from its late-year high at its lowest point this month. While it has seen some recovery, Wolfe Research suggests that further downside is likely. The firm pointed out that historically, Bitcoin bear market cycles have seen average peak-to-trough drawdowns of 75%, and the current cycle has not yet reached that magnitude.
January Existing Home Sales Miss Expectations
Data released on January existing home sales indicated a more substantial decline than anticipated. Sales fell by 8.4% from December to a seasonally adjusted annual rate of 3.91 million. This figure was below the 4.6% decline to 4.15 million that economists had projected.
Stocks Open Higher Amid Mixed Sentiment
Major U.S. stock indices opened Thursday’s trading session in positive territory. The Dow Jones Industrial Average gained 186 points, or 0.3%, while the S&P 500 and the Nasdaq Composite both rose by 0.3%.
Premarket Movers Include Restaurant Brands, QuantumScape, and Anheuser-Busch InBev
Several companies made notable moves in premarket trading, including Restaurant Brands, QuantumScape, and Anheuser-Busch InBev, indicating active investor interest in specific names ahead of the market open.
Jobless Claims Decline but Remain Above Forecasts
Initial jobless claims for the week ended February 7th decreased from the prior week, though the number still came in slightly higher than anticipated. The Labor Department reported that first-time filings for unemployment benefits totaled 227,000, a decrease of 5,000 from the revised figure of the previous period. Continuing claims, which reflect longer-term unemployment, rose by 21,000 to 1.86 million. Despite this increase in continuing claims, the four-week moving average for these claims reached its lowest level since early October 2024.
Economic Data Releases on Thursday Morning
The economic calendar for Thursday morning included several key releases. Initial jobless claims for the week ended February 7th were expected to come in at 225,000. Following that, January’s existing home sales data was due, with projections for a decline to 4.15 million units. These releases followed a strong jobs report for January and disappointing retail sales data for December, highlighting a mixed economic picture.
JPMorgan Downgrades Kraft Heinz Amid Persistent Challenges
JPMorgan has downgraded Kraft Heinz to an "underweight" rating from "neutral," citing persistent challenges that are expected to weigh on the company’s shares. The bank also lowered its price target for the food company to $22 from $24. This downgrade comes as Kraft Heinz reportedly backs away from plans to split its business. Analysts believe that the company faces limited near-term upside potential.
Existing Home Sales Data Poised for Release
January’s existing home sales figures were anticipated to show a significant drop. Economists predicted a 4.6% decrease from December, bringing the seasonally adjusted annual rate to 4.15 million units, down from 4.35 million in the prior report.
Jobless Claims Data Due for Release
Jobless claims data for the week ended February 7th was expected to show 225,000 initial claims for unemployment benefits, a slight decrease from the 231,000 claims filed in the preceding week.
Stock Futures Open Little Changed
Stock futures indicated a largely flat opening for the major U.S. indices on Thursday, suggesting a cautious start to the trading day as investors digest recent economic data and company news.
