Chip and Tech Stocks Struggle as Investors Favor Small-cap and Cyclical Stocks

Barry Adams
18 Jul, 2024
New York City

Tech stocks attempted to rebound after falling sharply in the previous session after two widely followed benchmark indexes increased to multiple record highs over the last seven weeks. 

The Nasdaq Composite advanced 0.2% after the index dropped the most in the previous session since 2022, as investors weighed rising trade restrictions with China. 

Moreover, mega-cap stocks rebounded after falling in the previous session as investors increased positions in cyclical and small-cap stocks. 

The Russell 2000 index, which tracks small-cap companies, increased 0.7%, and the benchmark index extended gains of 9% in the previous five sessions. 

The current market rotation is based on the assumption that the Federal Reserve is ready to lower rates as early as September, and lower rates are likely to benefit smaller and cyclical companies. 

The market rally broadened beyond mega-cap stocks in the last week of trading in the hopes that inflation's downward slide will continue and reach the Fed's target rate of 2%. 

Investors may be too optimistic about inflation, but despite the eleven rate hikes over 2022 and 2023, inflation has stayed above 3%. 

While the inflation rate has declined over the last two years, wages are still rising at a rate of more than 4% annually, inconsistent with the Fed's objective of bringing inflation down to 2%. 

Moreover, the Fed Chair is Jerome Powell signaling that interest rates could be lowered before inflation drops to 2%, as long as price increases are slowing, indicating that policymakers may talk tough but are more likely to abandon their long-held objective of weakening inflation to 2% or lower. 

 

U.S. Indexes and Treasury Yields

The S&P 500 index increased 0.3% to 5,605.26, and the Nasdaq Composite rose 0.2% to 18,024.79.

The yield on 2-year Treasury notes edged lower to 4.46%, 10-year Treasury notes decreased to 4.18%, and 30-year Treasury bonds edged higher to 4.30%.

WTI crude oil increased $0.13 to $82.97 a barrel, and natural gas prices edged up 4 cents to $2.07 a thermal unit.

Gold decreased by $1.74 to $2,480.01 an ounce, and silver was down 6 cents to $30.30. 

The dollar index, which weighs the U.S. currency against a basket of foreign currencies, edged lower to 103.91.

 

U.S. Stock Movers 

United Airlines Holdings increased 2% to $47.95, and the international carrier reported mixed quarterly results. 

Total revenue in the second quarter increased 5.7% to $47.95, net income jumped 23.1% to $1.3 billion from $1.1 billion, and diluted earnings per share advanced to $3.96 from $3.24 a year ago. 

Discover Financial Services rose 4.1% to $147.27, and the bank and payment services provider reported better-than-expected quarterly results. 

Revenue in the second quarter increased 17% to $4.5 billion from $3.9 billion, net income rose 70% to $1.5 billion from $895 million, and diluted earnings per share advanced to $6.06 from $3.54 a year ago. 

Total loans at the end of the quarter increased 8% to $127.6 billion from $117.9 billion, and the total net charge-off rate rose 161 basis points to 4.83% from 3.22% a year ago. 

Taiwan Semiconductor gained 2% to $174.95 after an advanced semiconductor maker reported better-than-expected quarterly results. 

Revenue in the second quarter increased 40% to NT $673.5 billion, net income jumped 36% to NT $247.8 billion, and diluted earnings per share rose 36.3% to NT $9.56. 

In U.S. dollars, second-quarter revenue increased 32.8% from a year ago to $20.82 billion, an increase of 10.3% from the previous quarter. 

Gross margin for the quarter was 53.2%, operating margin was 42.5%, and net profit margin was 36.8%. 

The company forecasted strong demand for its 3 nanometer production capacity from artificial intelligence-linked customers, and third quarter revenue is expected to range between $22.4 billion and $23.2 billion, and gross margin is expected to be between 53.5% and 55.5%.