Bitcoin "halving," and earnings from ASML Holding, Taiwan Semiconductor Manufacturing Co, and Netflix took Wall Street for a wild ride last week, with the CBOE Volatility Index spiking close to 25% Thursday.
The digital currency ended the week up 2.3% after dipping 5% Thursday evening, ahead of halving.
The S&P 500 closed at 4,967.23, down 1.9% for the week; the Dow Jones at 37,889.52, up 0.70%; the tech-heavy Nasdaq at 15,887.16, down 3.8%; and the small caps Russell 2000 at 1947.66, down 1.4%.
The losses in equities added to the previous week's losses, when the S&P 500 dropped 1.56% and the Russell 2000 3.4%. Last week was the worst week for technology shares since 2022.
Equity markets have been on edge in April for several reasons. One of them is the release of mixed inflation numbers by the U.S. government, confusing market participants over the direction of the Fed's next interest rate move. Some market observers scale back their expectations of the number of interest rate cuts this year, while others see no cuts at all or another hike.
Michael Busler, a Professor of Finance at Stockton University, doesn't see any interest rate cuts this year, and there may even be one or two rate hikes. In addition, he sees the U.S. economy slowing.
"Next week, the first estimate for GDP growth in the first quarter 2024 will be released. Most economists forecast a growth rate in the 2% to 2.5% range, less than the 3.3% rate in the fourth quarter of 2023," Busler told International Business Times. "Stocks have been rising, except for the last week, mostly because their profits are inflated, which drives up stock prices."
The confusion in equity markets over the direction of the Fed's monetary policy has spread to the debt market, too. It's causing wild fluctuations in U.S. Treasury bond yields, which are decisively on the rise.
That's bad news for risky assets like cryptocurrencies and equities. Higher yields raise the "carry cost" of these assets, making them less appealing to conservative investors.
Another reason for the rise in market volatility is the escalation of geopolitical tensions, such as the proliferation of the Israel-Iran war. This has hit Bitcoin hard, an asset class seen as a hedge against geopolitical uncertainties by digital currency enthusiasts.
A third reason is the shaky unfolding of the new earnings season, with several high-profile technology companies failing to please Wall Street's inflated expectations. On Wednesday, ASML Holding reported a bigger-than-expected decline in bookings, driving semiconductor stocks like AMD, Applied Materials, and Nvidia lower.
On Friday, Wall Street received another dose of disappointing news from TSMC. The Taiwan-based semiconductor manufacturer scaled back its forecast for weak auto industry demand for chips.
Meanwhile, Netflix provided a solid earnings report but disappointed Wall Street with its decision to stop reporting subscriber numbers effective 2025. Bulls perceived it as a sign that the streaming giant's feverish growth is reaching the end of the road, sending its shares sharply lower in Friday's regular trade session.
The decline in equities could have been worse if it wasn't for market rotation from the semiconductor sector to the healthcare, utilities, and financial sectors, which have been the laggards in the recent market run-up.
Overall, the large-cap earnings season has started with mixed results, according to FactSet, which monitors the financial results of S&P 500 companies.
"On the positive side, in a recent report, both the percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of earnings surprises are at or above their 10-year averages," wrote John Butters, Vice President of FactSet.
"On the negative side, substantial downward revisions to EPS estimates for two companies in the Health Care sector have caused a decline in the earnings growth rate over the past two weeks. As a result, the index is reporting lower earnings for the first quarter today relative to the end of last week and relative to the end of the quarter. However, the index is still reporting (year-over-year) earnings growth for the third-straight quarter," Butters added.
However, that may change next week, when several big tech names, from Tesla to Meta, Microsoft, and Alphabet, report earnings.
"Stocks are caught between high interest rates and soft earning guidance," Ernan Haruvy, Professor at McGill University, told IBT. "Interest rates and soft earning guidance will push stocks lower as investors flee to bonds. However, while inflation has been under control, it is expected to persist above historical levels. Interest rates are high but still at historical averages and have room to climb."
Still, Haruvy believes stocks belong to investment portfolios even in a high-interest rate environment. "Bonds are more vulnerable to interest rate uncertainty," he said, adding, "Hence, there is still room for a healthy proportion of stocks in one's portfolio. The reduction should be in high dividend stocks directly competing with interest-yielding bonds as a source of income."
(Disclosure: The author owns shares of ASML and TSMC)
