07/22/2024

So ends a week shaped by declines in the main world indices. A deteriorating performance for the North American indices, with only the Dow Jones Industrial Average managing to avoid weekly losses after hitting record highs early in the week. Technology continued to suffer under traders' pressure, and the Nasdaq Composite fell by -3.65% over the week. In Europe, the punishment was even more severe. The French and German stock markets were the hardest hit, reflecting greater doubts about the Chinese economy and the lack of concrete measures in the anticipated stimulus package. The Eurostoxx 50 index failed to close in positive territory on any day throughout the week, ultimately recording a significant decline of -4.28%.

Indeed, technology was one of the most impacted sectors this week, especially in Europe, despite ASML reporting strong results and a solid order backlog. Investors fear that the tightening of sales restrictions in China, a market to which major technology stocks are highly exposed, will diminish growth potential in the sector, particularly within the semiconductor segment. This segment is considered strategic, and the U.S. fears that China will accelerate its technological development by leveraging foreign technology. However, there are doubts about the best policy to curb this development, as China is intensifying its internal development efforts, given the limitations on acquiring the most advanced foreign technology. Microsoft’s troubles last Friday will also pose a challenge for the technology sector.

The prospect of a new Trump term in the White House starting in 2025 gained momentum, favoring the steepening of the yield curve, which negatively impacts the valuations of growth stocks, or the expectation of a renewed trade war, which is affecting sectors with greater international exposure, both in the US, due to fears of retaliation from increased tariffs, and in Europe, which fears not only potential US tariffs but also possible crossfire with China.

This news comes at a time when a rotation process had already begun from larger stocks to smaller ones. Initially, smaller-cap companies managed to provide some support to the main indices, but the deepening declines in large-cap stocks and technology ultimately pushed the S&P 500 into negative territory for the week.

The expectation of a strong earnings season, or the anticipation that the Fed may cut rates twice by the end of the year, could largely be priced in and might not serve as a significant catalyst, but we do believe they could offer some support amid a potential extension of profit-taking.

Market sentiment has shifted, with the overbought levels indicated by the RSI on the S&P 500 moderating rapidly following recent corrections. In recent days, the strong rotation between indices and sectors has caused disorderly and sharp market movements, such as the closing of short positions and the opening of long positions, driving volatility back up to levels seen last April, close to 17 points. We believe this digestion process could continue into the start of the week. As the market stabilizes, buying activity is likely to resume during the dips, as has been the trend throughout the year.