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Tech Sector Faces Earnings Concerns And Nasdaq Rebalances

U.S. stocks closed mixed on Friday, 21st July 2023, as the Dow and S&P edged slightly higher while the Nasdaq continued to slide following a selloff on Thursday.  

The previous day witnessed disappointing sales figures from Netflix, which fell by 8.4%, and lower than expected earnings from Tesla, causing a close to 10% drop in its stock price. 

On the positive side, initial jobless claims came in lower than expected at 228,000, marking a two-month low, but continuing claims saw an increase of 33,000, the largest rise in three months. Additionally, around USD 2.4 trillion in options expired on Friday, just ahead of the Nasdaq 100 rebalancing. 

Nasdaq released pro forma data to clients on Friday, revealing the adjustments index members will receive in the upcoming revamp. Companies like Meta Platforms Inc. (formerly known as Facebook), Apple Inc., Microsoft Inc., Alphabet Inc., Nvidia Corp., Inc., and Tesla Inc. are expected to receive downward revisions. 

For the week that ended, the Dow jumped 2.1% and the S&P 500 added 0.7%, but the Nasdaq Composite slipped 0.6%.  

Here are the closing levels on Friday, 21st July 2023: 

 Last Change %Change 
Dow Jones 35,227.69     +2.51. +0.01% 
S&P 500 4,536.34 +1.47. +0.03% 
Nasdaq Comp14,032.81 –30.50. –0.22% 
U.S. 10Y 3.83%   
VIX 13.6 -0.39 -2.79% 

Last week’s price action has given us some food for thought. The week started strong and was pointing to potentially breaking new highs. However, the negative impact of Netflix and Tesla earnings cannot be ignored. 

It is important to note that a 2.5% decline in the Nasdaq, though substantial, should be seen in the context of the index being up by more than 40% for the year. Nevertheless, it serves as a reminder that earnings must align with valuations, raising concerns about tech stocks’ ability to meet those valuations in the future. 

On a positive note, the Dow Jones average managed to record its 10th consecutive winning session, marking its longest streak in nearly six years. This indicates a broadening of the rally from a few chip makers and high-flying tech firms to other sectors of the economy, such as healthcare, energy, and banking. 

The current momentum remains positive as long as further deterioration in tech stocks can be avoided. It is worth noting that the tech sector was the driving force behind the explosive rally this year, and any significant decline in this sector could have broader market implications. 

The upcoming week will see a bulk of earnings reports and some central bank meetings, which could introduce volatility into the markets. 

As investors, it’s prudent to plan for the best outcomes while also preparing for potential challenges that may arise. 

Source: CBOE, Bloomberg 

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years.

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