Market Insights

Some investors have worried that overconcentration in large growth stocks could hurt the broader market. Now it might be coming true.

The S&P 500 fell almost 2 percent between Friday, July 12 and Friday, July 19. It was the first drop in three weeks and the biggest decline in 13 weeks. Technology stocks led the selling, especially semiconductor companies like Advanced Micro Devices (AMD). Oddly, more index members rose than fell. That suggests money could be shifting from large stocks to smaller corners of the market.

The big move started on Wednesday amid worries that the White House will restrict chip-related trade with China. That helped confirm a bearish technical pattern from July 11 when the Philadelphia Semiconductor Index was rejected at an all-time high. Some of the price action seemed like a reverse of big gains during the July 4 holiday week.

The second big event was on Friday after cybersecurity firm CrowdStrike (CRWD) caused one of the biggest computer outages ever. CRWD, which only joined the S&P 500 in June, had its sharpest weekly drop in almost two years. Those two items erased more than a month of the Nasdaq-100’s gains.

Strategists at Goldman Sachs warned a pullback could be starting, based on fund flows and seasonality. Ryan Detrick at Carson Group and Tom Lee at Fundstrat predicted leadership will shift to small caps for the rest of the year.

‘Goldilocks’ Data?

The economic news was mostly positive, with growth continuing as the Federal Reserve moves toward cutting rates.

Core retail sales, for example, were better than expected in June and May was revised higher. Housing data, industrial production and leading economic indicators also surprised to the upside. Initial jobless claims and the Fed’s Beige Book survey of economic conditions, on the other hand, reflected more softening.

“If you wait until inflation gets all the way down to 2 percent, you’ve probably waited too long,” Chairman Jerome Powell said on Monday. That seemed to confirm he wants to cut interest rates soon. The market largely expects the move on September 18, with potential confirmation from the central bank on July 31.

Overall, the news seemed to confirm a potential “Goldilocks” scenario. Inflation isn’t “too hot” and growth isn’t “too cold.” That’s often considered positive for risk appetite.

Banks Break Out

Banks were the best-performing group last week as companies like Huntington Bancshares (HBAN), Regions Financial (RF) and State Street (STT) jumped to new 52-week highs. HBAN and STT reported better-than-expected earnings, while RF said net interest income will be near the high end of guidance. The moves are consistent with a trend of widening profitability in the industry, 15 months after the collapse of Silicon Valley Bank.

Housing stocks, energy, small caps and real estate investment trusts also gained last week.

Semiconductors, this year’s top performers, dropped about 9 percent. Solar-energy stocks crumbled on the prospects of a potential second Trump Administration. Software and precious metals also fell.

Warner Bros. Discovery (WBD) had the biggest gain in the S&P 500 on reports it may divest assets or spin off businesses. D.R. Horton (DHI) reported better-than-expected quarterly results and announced a $4 billion stock buyback. UnitedHealth (UNH) surged to a new all-time high after profit beat estimates.

Crude Oil and OPEC+

Despite the gains in energy stocks, crude oil closed at its lowest level in a month. The commodity potentially faces softer demand, based on refinery data in China and the U.S. Traders could also worry about the prospect of increased supply with an OPEC+ meeting on August 1. Reuters reported on Thursday that the cartel will probably allow production to increase despite signs of weaker demand.

Lower oil prices could potentially support sentiment over the longer run because it would reduce inflationary pressures.

Charting the Market

Last week’s slide followed a moment of giddiness as sentiment reached the most bullish levels of the year. (That’s based on the American Association of Individual Investors’ weekly survey.) The pullback may have done some technical damage, while creating potential opportunities for trend followers.

One negative was the bearish outside week. The S&P 500 hit an all-time high near 5670 before stalling and diving to its lowest level since July 2. That’s a potential reversal pattern.

On a more positive note, traders may notice that Wilder’s Relative Strength Index (RSI) has dipped from an overbought condition. They may also look for support around 5,500 and the 21-day exponential moving average, which were both near Friday’s close.

The Week Ahead

This week features big economic reports on Thursday and Friday. Earnings also get more active with about one-quarter of the S&P 500 reporting. Most of the companies are less-prominent members of the industrial and financial sectors.

Verizon Communications (VZ) and Truist Financial (TFC) report today.

Tomorrow morning brings General Motors (GM) and Coca Cola (KO). Tesla (TSLA), Alphabet (GOOGL) and Visa (V) announce in the afternoon. Existing home sales are also due.

Crude-oil inventories on Wednesday morning could provide a potential catalyst for the commodity. Some of the big quarterly reports include Ford Motor (F), ServiceNow (NOW), International Business Machines (IBM) and Las Vegas Sands (LVS).

Gross domestic product (GDP) is on Thursday morning. It’s the government’s first estimate of economic growth in April, May and June. It also includes potentially important price data. Initial jobless claims and durable-goods orders are due as well.

Friday brings the personal consumption expenditures (PCE) price index. While often a key measure of inflation, it may have less impact this month because the market has a clear sense of upcoming monetary policy.

Next week is the biggest part of earnings season, with results from heavyweights like Apple (AAPL) and Microsoft (MSFT). There’s also a Fed meeting.

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