US Stock Markets Dip as Tech Earnings and AI Concerns Weigh
US stock markets struggled on October 31, 2023, as investors reacted to ongoing corrections in technology stocks, particularly those associated with artificial intelligence. The S&P 500 Index fell by 0.07%, while the Nasdaq 100 Index decreased by 0.08%. In contrast, the Dow Jones Industrial Average showed slight resilience, increasing by 0.03%. This downturn adds to a series of losses, with the S&P 500 and Nasdaq 100 hitting 1.5-week lows.
The market’s woes are largely attributed to a correction in AI-infrastructure stocks, driven by concerns over inflated valuations. Notably, shares of Super Micro Computer plummeted by more than 7% following the release of disappointing first-quarter net sales figures that fell short of expectations. In addition, weaker-than-anticipated earnings reports from various technology companies have contributed to the downward trend, intensifying long liquidation pressures among investors.
Despite these challenges, futures for US stock indexes showed some recovery after the release of the monthly ADP employment report. This report indicated that private-sector employers added 42,000 jobs in October, surpassing the anticipated 30,000 jobs. This positive data helped alleviate some economic concerns, although broader market sentiment remains cautious.
The US Treasury announced plans to sell $125 billion in T-notes and T-bonds in the upcoming quarterly refunding, aligning with market expectations. Officials indicated that they do not plan to increase the sales of notes and bonds until well into next year and will increasingly rely on short-term T-bills to address the budget deficit.
In the housing market, mortgage applications fell by 1.9% for the week ending October 31. The purchase mortgage sub-index decreased by 0.6%, and the refinancing sub-index declined by 2.8%. The average rate for a 30-year fixed mortgage rose slightly to 6.31% from 6.30% the previous week.
Looking ahead, the market anticipates a 68% chance of another 25 basis point rate cut at the next Federal Open Market Committee (FOMC) meeting scheduled for December 9-10. Investor attention is also focused on oral arguments at the Supreme Court regarding the legality of President Donald Trump’s reciprocal tariffs, with a ruling expected by late 2023 or early 2026. Previous lower court rulings deemed these tariffs illegal, which could prompt significant fiscal implications for the US government.
The ongoing government shutdown, now in its sixth week, represents the longest in US history and continues to weigh heavily on economic sentiment. The shutdown has delayed numerous government reports and is adversely affecting the economy, contributing to market unease.
Overseas, stock markets displayed mixed results. The Euro Stoxx 50 Index fell by 0.40%, while China’s Shanghai Composite Index managed a modest recovery, closing up 0.23%. Japan’s Nikkei Stock 225, however, saw a notable decline, falling by 2.50% to reach a 1.5-week low.
In the bond market, December 10-year T-notes saw a decrease of 5 ticks, with the yield rising by 2.7 basis points to 4.112%. The uptick in yields followed the positive employment report, which could influence Federal Reserve policy. Conversely, the ongoing government shutdown is providing underlying support to T-note prices, as it could lead to job losses and reduced consumer spending, creating a potential environment for continued rate cuts.
European government bond yields also exhibited mixed trends. The yield on the 10-year German bund fell slightly by 0.1 basis points to 2.653%, while the 10-year UK gilt yield rose to a two-week high of 4.456%.
As the earnings season progresses, 136 companies from the S&P 500 are set to report this week. According to Bloomberg Intelligence, around 80% of the companies that have reported so far exceeded earnings forecasts, indicating a potentially strong quarter. However, year-over-year profits are projected to increase by only 7.2%, marking the smallest growth in two years, while sales growth is expected to slow to 5.9%, down from 6.4% in the previous quarter.
In summary, the combination of AI stock corrections, mixed earnings results, and economic uncertainties continues to influence market dynamics, as investors navigate a complex landscape marked by both challenges and opportunities.
