Nasdaq 100 Deepens Big Rotation, Extends Tech Gap

The U.S. stock market ends another very tough week for the tech sector on Friday. Investors were eagerly awaiting results from Alphabet and Tesla, eager to take the pulse of the vibrant tech stocks and to see where the North American stock market would go after a portfolio rotation toward small-caps that began at the height of the crisis. June inflation data came in. However, two big tech companies delivered disappointing results, fueling concerns about a possible artificial intelligence bubble, leading to a sell-off in tech stocks that led to the biggest drop in the Nasdaq 100 and S&P 500 since late 2022. The tech benchmark fell more than 3%, while the Russell 2000, an index of small caps, rose more than 3% over the same period. That reflects a portfolio rotation toward smaller firms prompted by a potential rate cut in September, which rose sharply on Friday after the release of the Fed’s favorite PCE deflator.

Thus, the main US indexes are recording gains in the session during which the personal consumption expenditure (PCE) deflator index was published, which fell by a tenth in June compared to May, to 2.5% year-on-year. Although the underlying figure was unchanged at 2.6%, the news stimulated the North American stock market today. It allowed the Nasdaq 100 index to recover some of the ground lost due to the shock of the Alphabet and Microsoft results, and to rise by 1.03% to 19,023 whole numbers. However, the tech index is losing just over 2% on the week, clearly punished by the Google parent company and the Musk brand, which have registered weekly declines of 6% and 8%.

In this regard, Alphabet’s revenue was $84.74 billion, compared to the estimated $84.37 billion. In addition, its profit was $1.89 per share, compared to the estimated $1.84. This represents a profit of $27.43 billion. On the other hand, YouTube earned $8.66 billion in advertising revenue, which is less than the estimated $8.93 billion. Meanwhile, Google Cloud’s revenue was $10.35 billion, compared to the $13.54 billion expected by investors.

For its part, Elon Musk’s company missed earnings expectations, reporting $1.61 billion in profits compared to $1.81 billion expected by analysts and $2.703 million in the same period last year. That represented a 46% drop in profits compared to the same period last year. Additionally, while the company’s revenues beat expectations, reaching $25.5 billion, its business expenses soared 39%. The company also said it expects “noticeably lower” sales growth than it had previously estimated.

All of this caused consternation among investors, who rushed to dump tech stocks, spreading the sell-off across the sector and hurting the S&P 500 index. This indicator today rises by 1.27% to 5470 points.thanks to Charter Communications (+16.63%), 3M (+16.22%), which earned more than $1 billion in the second quarter of the year, and Mohawk Industries (+16.04%). However, for the week, the indicator fell by 1.14% as a result of the stock market shock from the tech side.

The Dow is a different story. While the industrial sector has been dragged down on other occasions by the centrifugal force of the tech sector, most powerful this year thanks to artificial intelligence, it is the only major index to turn green this week. Thus, the Dow is up 1.91% to 40,699 thanks to 3M, accumulating a weekly gain of 0.98%. Meanwhile, the Russell 2000 small-cap index is up 1.14% to 2,248, up 2.93% for the week. The turn toward small-caps was confirmed in tandem with “technical evidence that investors are reducing their risk concentrations in the ‘seventh lag,’” according to Craig Johnson, an analyst at Piper Sandler.

Next week will therefore be key to more accurately gauge the health of the tech sector, as Apple, Microsoft, Amazon and Meta take center stage in the results. The reports of these Magnificent Ones will mark a new course, which could follow the development of artificial intelligence or the development of small caps. In this sense, George Maris, an analyst at Principal Asset Management, notes that “we haven’t seen a rotation like this in decades,” stating that it will have “enduring power.” Of course, the operators’ navigation maps will not be finalized until Nvidia reports its results at the end of August.