Stocks Ending October on Sour Note as Tech Tumbles: Markets Wrap

(Bloomberg) -- Stocks got hit as disappointing outlooks from giants Microsoft Corp. and Meta Platforms Inc. fueled concern that this year’s 45% surge in the megacaps that have powered the bull market might have gone too far.

The S&P 500 slid 1.7%, halting a streak of monthly gains that would have been the longest since 2021. The Nasdaq 100 dropped 2.5%. While results from the pair of tech titans weren’t bad, their guidance added to concerns on whether the cohort can sustain massive profit growth while investing billions of dollars in artificial intelligence. Those worries hit a market showing signs of exhaustion near record highs ahead of next week’s US election and the Federal Reserve decision. All megacaps retreated, including Apple Inc. and Amazon.com Inc., which report earnings after the close. 

“Halloween is bringing tricks, not treats to many investors,” said Steve Sosnick at Interactive Brokers. “The market’s mindset seems to be switching from one where anything AI-related was a reason for enthusiasm towards one where investors are looking for some returns on their massive spending.”

Moreover, there’s a nearly palpable narrative taking hold that the election - rather than offering a sense of certainty - will do just the opposite, causing volatility to spike, Quincy Krosby at LPL Financial. That’s not to mention the jobs report on Friday. In the run-up to the figures, data showed unemployment claims fell to their lowest since May while a key inflation gauge picked up.

The S&P 500 hovered near 5,715 in its biggest slide since early September. Still, this year’s rally through October is on pace to be the strongest in a presidential election year since 1936, according to Bespoke Investment Group strategists. Historically, strong rallies of at least 20% in that span have been followed by stronger-than-normal finishes to the year, they said.

Treasuries edged mildly higher on Thursday, but were set for their biggest monthly rout in two years on bets the Fed won’t be too aggressive with rate cuts amid a strong economy. UK bonds, stocks and the pound tumbled as investors dumped British assets in a swift rebuke of the new Labour government’s willingness to run up borrowing and risk faster inflation.

Gold retreated as some investors booked profit after the metal’s rally to a fresh record. Oil rose for a second day after US crude inventories shrank and fighting continued in the Middle East.

The guidance out of Microsoft and Meta raise some of the same questions that we heard during the last earnings season, according to Matt Maley at Miller Tabak Co. Back then, he says it became evident that the big jump in earnings that the chipmakers were experiencing had not broadened out to the end users of those chips

“Thankfully, Alphabet did show some signs that their ROI on the AI phenomenon is bearing some fruit,” Maley said. “However, last night’s results do seem to indicate that it could still be a much longer time for these returns to build up in a significant way for many companies — at least when you compare it to the timeframe investors have been assuming for much of this year.”

If that is indeed the case, it’s going to be much tougher for the investors to justify today’s very expensive stock market which is especially true given that longer-term yields have been rising at a steady and material pace over the past six weeks, Maley noted.

Investors need to make sure they have diversification within tech and that they are not solely invested in the parts of the AI trade that have worked such as semiconductors, according to Michael Landsberg, chief investment officer, Landsberg Bennett Private Wealth Management.

“It makes some sense to trim some from those names that have worked so well over the past 12-18 months and look for AI laggards as well as other tech themes like cybersecurity, robotics and automation, and smart homes and cities,” he said.

“So far, none of the primary trends we are tracking have been negated, so we continue to view the weakness as profit-taking/consolidation overall,” said Dan Wantrobski at Janney Montgomery Scott. “Although trading charts are already starting to press into moderately oversold territory, so we would anticipate a counter-trend bounce to materialize relatively soon.”

Strong reports from Apple and Amazon could cement the narrative that the megacap tech group remains Wall Street’s most-reliable trade. Disappointments, coupled with the pair’s index weight and multiples, could dash hopes of the market returning to record levels.

Investors are looking to Apple to at long last provide concrete information about demand for iPhones with artificial intelligence features, a product cycle investors are counting on to propel the company out of a low-growth era. 

Amazon’s report will give insight into the state of the consumer with its e-commerce business, while results from its cloud-computing business will show any tailwind from AI, following similar reports from Alphabet and Microsoft.

“The S&P 500 is slightly lower in October, but luckily, November seasonality is a big tailwind,” said Bespoke strategists.

Over the past 100 years, November has ranked as the fourth-best month with an average gain of 1.3% and positive performance 63% of the time,they said. More recently in the past 50 years, it is one of two months (the other being April) in which the index has averaged a gain of more than 2%. In that timeframe, it also traded higher more consistently than any month. 

Looking only at the past twenty years, November’s 2.43% average gain is only edged out by July’s 2.45% gain for the best month of the year, Bespoke concluded.

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This story was produced with the assistance of Bloomberg Automation.

--With assistance from Robert Brand.

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