Nasdaq sell off fails to dent enthusiasm in Europe

Is the rotation out of highly priced tech stocks and towards value stocks happening? It’s hard to believe that investors will ditch tech completely, but there are signs that other sectors of the market are playing catch up. The price action in the aftermath of the US CPI report on Thursday showed an early preference for sectors other than tech. Interest rate sensitive sectors of the S&P 500 dominated on Thursday, with real estate rising 2.6% and the IT sector plunging 2.7%. Since European stock indices have a lower proportion of tech compared to the US, European shares are benefiting from this trend at the end of the week.

In the UK, the FTSE 100 is led higher by healthcare and energy stocks, the latter are a good antidote to tech stocks elsewhere. In Europe, the best performing sectors include consumer discretionary and energy, both sectors that tend to do well when interest rate cuts are on the cards.

The past week has seen three notable shifts in sentiment:

Volatile tech stocks, as expensive chip makers experience a sell-off in favour of cheaper, more interest rate sensitive sectors of the market. For example, Nvidia’s share price rose sharply earlier this week, before falling 5% on Thursday, it is currently clawing back some of yesterday’s losses in pre-market trading on Friday.

The market is nearly fully pricing in a September rate cut from the Federal Reserve, and there is a 92% chance of a cut now priced in by the Fed Funds Futures market. The market is now expecting more than 2 rate cuts from the Fed this year. This pricing suggests that the market is confident that the US will engage in a rate cutting cycle in the coming months, and that rates will not stay higher for longer. Higher for longer has been extremely beneficial for tech giants, particularly in the cash rich AI sector, like Nvidia. If rates are set to move in a downward trajectory, then it gives the rest of the market time to catch up. However, we do not think that this is the start of a downtrend for the likes of Nvidia. Its business continues to deliver, and there was no fundamental reason for its decline on Thursday. This is not a zero-sum game, instead, tech stocks could rise at a slightly slower pace than other sectors of the market, as we still think that investors will choose to pile into US index ETFs, which favour stocks with the largest mark caps.

UK rate cut expectations for August have sunk this week. There is now only a 57% chance of a cut next month, this is down from 65% at the start of this week. The contrast between rising expectations for US rate cuts and falling expectations for UK rate cuts, along with a larger real interest rate differential between the UK and elsewhere, has sent the pound surging this week. GBP/USD is testing $1.2950 once again this morning, if it can clear this hurdle then it opens the door to life above $1.30 for this pair, and a higher range between $1.30 and $1.40.

Bank earnings due

Today also sees the start of Q2 earnings season, with a plethora of US banks announcing results. JP Morgan will be watched closely; they will release earnings before the US market opens. Ahead of these results, JPM’s stock price is up slightly at 0.2%. The stock price has risen by 4% in the past month and more than 20% YTD. Investors have favoured the strength and security offered by the US’s biggest banks in the midst of real estate woes that are impacting some of the smaller US banks. The markets are expecting a decent uptick in investment banking income as M&A has come back into fashion. For JPM, analysts are expecting net interest income, a highly watched metric, of $22.82 bn, which is a decent return, especially since the bank is also paying more on deposits. Investment banking revenue could be more than $2.13bn this quarter, fixed income trading revenue is expected to be $4.85bn and equity trading is expected to be $2.66bn. Citi bank and Wells Fargo are also reporting earnings, however, JPM is the US’s largest bank and its results will be considered a bell weather for the sector.

Since bank stocks have had a good run this year, there is room for a sell-off if the results disappoint, especially since investors are currently favoring less loved sectors of the market.