Tech Outage Sends Stocks Tumbling: What’s Next for the Market?

Stocks pulled back from record highs last week, with the S&P 500 and Nasdaq Composite both experiencing significant declines. The S&P 500 ended the week down nearly 2%, while the Nasdaq dropped more than 3.5%, marking their worst weekly performance since April. In contrast, the Dow Jones Industrial Average rose about 0.7%.

The tech sector faced pressure following a global tech outage that sent shockwaves throughout the market on Friday. This week, critical readings on economic growth and inflation, as well as the start of Big Tech earnings, will determine if the malaise continues.

Investors will also be digesting the news that President Joe Biden will no longer be seeking reelection. Biden’s announcement has thrown the election and Democrats’ economic agenda into turmoil.

On the economic data side, the advanced reading of second-quarter economic growth is slated for Thursday, followed by the June reading of the Personal Consumption Expenditures index, the Fed’s preferred inflation gauge, on Friday.

In corporate news, a slew of S&P 500 companies are expected to report quarterly results in a week headlined by Alphabet, Tesla, and Chipotle.

Last week, new data showing a slowdown in inflation prompted markets to put the chances that the Federal Reserve cuts rates by the end of its September meeting at 100%. This week, another look at inflation will come with the Fed’s preferred gauge, the Personal Consumption Expenditures (PCE) index.

The week ahead will also bring the first reading of Gross Domestic Product (GDP) for the second quarter. Economists expect the US economy to have grown at an annualized pace of 1.9% in the second quarter, up from the 1.4% growth rate seen in the first quarter.

Since investors have become more optimistic about the likelihood of multiple interest rate cuts this year, a shift has been underway within the stock market. Real Estate and Financials have led individual sector action, while Technology and Communication Services, the market’s biggest winners of the past year, have recently been the worst-performing sectors in the S&P 500.

The rotation has also extended to cap size, with small caps joining the stock market rally. The small-cap Russell 2000 is up about 8% over the past month, sparking debate over whether this bout of small-cap outperformance can continue.

With Big Tech stumbling amid the market rotation, the fundamental story for some of the stock market’s largest names will be in focus in the week ahead. Tesla and Alphabet are slated to report earnings after the bell on Tuesday, providing an early read on investor appetite for the most popular trade of 2023.

Overall, the performance of Big Tech companies will likely determine the trajectory of earnings growth for the broader S&P 500. The S&P is currently on pace to produce year-over-year earnings growth of 9.7%, the best quarter for earnings growth since the fourth quarter of 2021.

In conclusion, the upcoming week will be crucial for investors as they navigate economic data releases, corporate earnings reports, and the ongoing market rotation. Stay tuned for more updates on the latest stock market news and events.