Markets find their feet after a rocky start

SINGAPORE – It has been a turbulent week for markets, with sentiment worldwide rattled as big tech stocks were sold down on earnings and valuation concerns. However, a positive ending on Wall Street on July 26 portends better days ahead.

While the latest US data suggests that inflation has been largely tamed and the US economy is still humming along nicely, the biggest issues hanging over the market are geopolitics and US politics.

That said, a July 26 recovery on Wall Street, following several whiplash sessions, was welcome relief to traders.

The Dow Jones Industrials rallied 654.27 points on July 26 to end the week with a net 0.8 per cent gain at 40,589.34 points. But the S&P 500 and tech-heavy Nasdaq Composite had a second consecutive week of losses, with the former ending 0.8 per cent down for the week at 5,459.10 points, while the Nasdaq gave up 2.1 per cent to 17,357.88 points.

In Singapore, the Straits Times Index was relatively defensive last week, seeing about half the declines of the S&P 500 and spending most of the week trading between 3,460 and 3,420 points. The benchmark index ended the week down 0.6 per cent at 3,426.47, bringing its July month-to-date total return to 2.8 per cent and the 2024 year-to-date total return to 8.6 per cent.

The five strongest index component stocks on the week were YZJ Shipbuilding (up 12.6 per cent), Seatrium (up 2.7 per cent), Jardine Matheson (up 1.2 per cent), Jardine Cycle & Carriage (up 1 per cent) and Singtel (up 0.7 per cent). Singtel booked the highest institutional inflows for the week as it rose to close at $3.04 – its highest level since March 2020.

Looking ahead, the trajectory of the market will also hinge on the current earnings season, which is set to intensify in the week ahead, with two heavyweights – UOB and OCBC Bank – reporting earnings later this week. Other notable earnings unveilings will be by Raffles Medical Group, Seatrium, Keppel, Singapore Airlines, Great Eastern Holdings and a slew of S-Reits.

Calming the markets on July 26 was the latest US Personal Consumption Expenditure or PCE numbers for June, showing that prices rose 0.1 per cent month on month and 2.5 per cent year on year. This was within market expectations, and has further solidified confidence that the US Federal Reserve will start cutting rates by September.

The July 26 recovery was also triggered by oversold positions following sharp selldowns of leading tech names earlier in the week. But instead of pulling money out of the market, traders said there was noticeable rotation to second-liners and names which had underperformed the tech rally so far.

Wall Street’s S&P SmallCap 600 index rose 3.6 per cent as investors rebalanced their portfolios to second-liners and non-tech plays. Market strategists see this rotation starting to take hold as valuation of many of the big tech and marquee names gets stretched.

Despite the tech pullback, many analysts believe this segment will continue to dictate the market’s direction.

“Looking through the near-term noise, we think tech will drive returns as consensus expects big tech companies to carry positive earnings results for the market,” said BlackRock Investment Institute. “We see pullbacks as an opportunity to lean into these stocks. We stay overweight on the artificial intelligence (AI) theme and US stocks as we watch for AI build-out to boost other sectors.”

Meanwhile, all eyes are on the Fed, which meets in July.

Although stronger than expected US second-quarter gross domestic product (GDP) at 2.8 per cent has caused some anxiety in parts of the market, which were expecting a soft-landing scenario to prompt Fed action on rates, some analysts see the latest quarterly GDP as unsustainable.

Mr Vasu Menon, managing director for investment strategy at OCBC, noted in a report late last week that consensus forecast has quarter-on-quarter US economic growth slipping to 1.5 per cent in the third and fourth quarters from 2.8 per cent in the second quarter .