Investors retreat as this year’s ‘everything rally’ comes to an end

(Adds chart, details on upcoming reports, stock valuations, investor commentary)

By Amanda Cooper and Naomi Rovnick

LONDON, July 25 (Reuters) – Investors are pulling back from some of their favourite trades this year as a pullback from luxury large-cap stocks threatens to unleash a sell-off that has hit everything from cryptocurrencies to gold and made predicting the market’s next moves even more complicated.

Wall Street stocks on Wednesday posted their biggest daily sell-off since late 2022, with the Nasdaq Composite, an index of technology companies, down 3.6% and the S&P 500 down 2.3%. Both indexes recovered some of those losses on Thursday.

The “everything rally” of 2024 – rising stocks, especially tech stocks; rising gold and cryptocurrency prices; rising dollar; rising emerging markets – may be on hold.

A variety of factors have fueled market concerns about how high valuations of big tech companies could get amid rising U.S.-China trade tensions and weak earnings.

Quarterly results from Tesla and Alphabet, the first of Wall Street’s most valuable companies to report their earnings, have investors excited ahead of a rash of earnings next week.

Microsoft reports Tuesday, followed by Meta Platforms on Wednesday, then Amazon and Apple on Thursday. The four companies have a combined market value of more than $9 trillion and account for a fifth of the entire S&P 500.

“Investor positioning has been quite pro-risk, with people becoming quite positive about markets and valuations becoming quite tight,” said Toby Gibb, head of investment solutions at fund manager Artemis in London. “It’s hard to say whether the market will continue to correct.”

Volatility has increased, with the VIX index rising on Wednesday by its largest daily gain in two years.

The S&P 500 is trading at nearly 22 times expected earnings, a two-year high, according to LSEG data. The index’s recent decline has put it 14% higher in 2024.

“On the other hand, (markets) are valuation insensitive and the same thing is happening on the other side. The volatility compression that you have upside goes in the opposite direction downside,” said Mario Baronci, portfolio manager at Fidelity International.

The AI ​​boom on Wall Street has created a two-tiered stock market, with large-cap companies driving the S&P 500 to record highs while the rest largely underperforms.

Keith Lerner, co-chief investment officer at Truist Advisory Services, maintains a positive long-term outlook for technology stocks, but believes they could face more volatility in the future.

“Tech is correcting from its strongest two-month relative outperformance since 2022,” he wrote in a report Thursday. “Our base case is that the long-term bull market remains intact, but it’s often two steps forward, one step back.”

Meanwhile, China’s economy is slowing faster than economists and Beijing officials had predicted, dragging down goods. Europe’s domestic luxury megacaps, another favored trade, have shed a quarter of a trillion dollars in value since their peak in March.

WHITE HOUSE ROLLER COAST

Then there’s the rollercoaster race for the White House, where Democratic President Joe Biden withdrew his vice presidential nomination from Kamala Harris shortly after the assassination attempt on Donald Trump. The Republican candidate’s anti-China rhetoric and potentially inflationary policies have hurt chipmakers around the world and hurt U.S. 30-year government bonds.

Some large investors, however, believe that this is just a period of bull market growth, which has been unfairly shrouded in the fog of geopolitical risk.

“I think these narratives are being used to create an excuse for what was probably just lukewarm profit taking,” said Richard Clode, technology portfolio manager at Janus Henderson Investors.

While stocks and other 2024 assets like gold, which is up 14% this year, took a beating this week, small-cap stocks and classic safe-haven investments like the Swiss franc and the Japanese yen also saw gains.

This is more than just escaping risk.

These currencies have been used for years to fund assets with juicy returns. As the Federal Reserve prepares to lower interest rates and doubts creep in about the robustness of the stock market rally, these so-called carry trades are falling apart.

That is putting additional pressure on the dollar, even as short-term Treasury bonds have gained this week, sending yields to their lowest in almost six months.

“Many investors have been selling the yen to buy tech stocks, and the recent strengthening of the yen and the unwinding of carry trades has caused a forced sell-off in the large-cap tech sector as well,” said Jeff Schulze, head of economic and market strategy at ClearBridge Investments.

Clode said that given that summer trading is typically low and early autumn sees an increase in volatility, this is a time when investors take profits, adding that it could be a buying opportunity.

Many investors, long conditioned to treat sell-offs as temporary market rallies and often focused more on asset prices than valuations, might agree.

“I call it the ‘Bitcoin Syndrome.’ When it goes down, people don’t care. People think it’s going to go up sooner or later and that a correction is a good time to get back in,” Fidelity’s Baronci said.

Bitcoin itself, however, lost 5% in a matter of days to around $64,000.

David Morrison, senior market strategist at Trade Nation, warned against complacency.

“Further gains are anticipated based on solid second-quarter results, along with positive guidance for the current quarter. If this does not happen, expect more profit taking,” he said.

“Investors have muscle memory for this type of thing.”

(Additional reporting by Danilo Masoni in Milan, Alden Bentley in New York and Noel Randewich in Oakland, California; editing by Susan Fenton)