Stocks Reverse After CPI Report—Tech Sector Hit Hard
Stocks Reverse After CPI Report—Tech Sector Hit Hard
By:JJ Kinahan
Earnings season began with the Russell 2000 soaring, AI stocks plummeting and rate cut hopes rising
The S&P 500 fell 0.88%, ending a six-day record streak; tech stocks dropped nearly 2%.
The Russell 2000 rallies 3.6%, hinting at sector rotation; bonds and precious metals also gained.
AI stocks and Tesla plunged, and the CPI report boosted September rate cut hopes to 93%.
Stocks initially rallied modestly yesterday, following the latest consumer price index (CPI) report, which indicated inflation is continuing to cool. This positive news briefly lifted the market's spirits, but by mid-morning, a metaphorical Nantucket fog rolled in, sharply reversing the tide of optimism.
The S&P 500, which had climbed as high as 5642, ended the day down 0.88%, closing just over 5584. This decline marked the end of a streak of six consecutive record high closes. The tech sector fared even worse, with stocks reversing nearly 400 points to close down 1.95%.
In stark contrast, the Russell 2000 posted its best day since November, gaining over 3.6%, hinting at a potential sector rotation. Bonds also experienced a strong rally, with yields on the 10-year dropping to 4.192%. Precious metals joined the rally, with gold gaining 1.8% and silver adding 2%.
Bad day for AI
Artificial Intelligence (AI) stocks were among the biggest losers of the day. Nvidia (NVDA) fell over 5.5%, Arm Holdings (ARM) dropped 7% and Dell Technologies (DELL) decreased by 3.45%. Meanwhile, Tesla shares plummeted nearly 8.5% on reports that the company is postponing the release of its robotaxi. This sharp drop halted an impressive 11-day winning streak that had seen the stock surge 40%.
Earnings season also kicked off yesterday with PepsiCo (PEP) and Delta Air Lines (DAL) reporting. PepsiCo's shares closed relatively unchanged despite the company reporting disappointing sales numbers. Global sales fell by 2% as customers cut back on spending. Delta Air Lines echoed a similar sentiment, with summer travel projections coming in weaker than expected despite a strong travel season. This trend could signal a continuation of weakening consumer spending, even as inflation eases.
This morning, major banks including Citibank (C), JPMorgan (JPM) and Wells Fargo (WFC) are scheduled to release their earnings reports. JP Morgan saw investment banking fees jump 50%, helping the company surpass expectations. However, Wells Fargo reported higher-than-expected expenses, which overshadowed their earnings beat. In premarket trading, JP Morgan's shares indicated a 1.5% decline, while Wells Fargo was down over 6%.
It’s the economy
Turning to economic news, yesterday’s consumer price index (CPI) report showed core prices increasing by just 0.1% month-over-month. This modest increase buoyed hopes for interest rate cuts this fall. Before the report, there was a 75% chance of a rate cut in September, according to the CME Fed Watch Tool. Following the report, these probabilities increased to 93%. Hopes for a cut rose further this morning after the producer price index (PPI) report. Despite coming in stronger than expected, the chances of a rate cut in September now stand at 96%.
For today, I am keeping a close eye on market volatility. Despite yesterday's significant reversal, the The Chicago Board Options Exchange's volatility index (VIX) increased only by 0.5%. This muted response suggests the market may not have taken the selloff seriously. If we are to see continued selling, an increase in volatility will be necessary. As always, it is important to stick with your investing plan and long-term objectives.
JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan
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