Market

Nasdaq leads drop in stocks ahead of tech earnings, as major indexes pull back from records

U.S. stocks closed lower Tuesday, after a five day rally to record highs for the main indexes, ahead of quarterly results from some of the most prominent names in the technology sector and as a Chinese regulatory crackdown dampened the investing mood on Wall Street

The developments in Asia come as investors are also waiting for economic reports this week, including second quarter GDP, and a policy update from the Federal Reserve on Wednesday.

How did stock benchmarks trade?

On Monday, major benchmarks closed at record highs for a second straight session. The Dow and the S&P 500 each rose 0.2%, and the Nasdaq Composite inched higher to also set a fresh record. All three indexes rose for a fifth straight day.

What drove the market?

Stocks slumped, led by technology stocks, as investors worried about a selloff in Hong Kong’s Hang Seng Index, which has put pressure on risk assets around the globe.

“How many straws does it take to break a camel’s back?” said Arnim Holzer, macro and correlation defense strategist with EAB Investment Group, in a phone interview Tuesday. “What we’re seeing now is a market where there are a lot of straws.” 

Concerns weighing on the stock market include China’s crackdown on technology companies and worries that the delta variant of the coronavirus will hurt global growth, according to Holzer. Companies in the S&P 500 index have a significant portion of earnings outside the U.S., he said.

The Hang Seng HK:HSI ended 4.2% lower in Asian trade, marking its second consecutive drop of more than 4%, amid China’s regulatory crackdown on technology stocks.

Meituan
3690,
+0.98%

shares dived after China published rules requiring online food platforms to pay minimum wage, but the selling was broad-based, with technology giants Tencent
700,
-3.50%

and Alibaba
9988,
-0.22%

BABA,
-2.97%

each seeing sharp declines.

Still, analysts noted that U.S. stocks were trading near all-time highs and argued that considerations closer to home were likely to call the tune for markets beyond any immediate reaction to the China developments.

Read: Market fragility lingers as VIX climbs even with U.S. stocks rising to peaks, BofA says

The “two big factors” over the course of the next week remain “earnings reports and what we hear from the Federal Reserve,” said Bill Northey, senior investment director at U.S. Bank Wealth Management, in an interview, adding that “this is against a backdrop of a very strong economic recovery” that was underscored by a strong July consumer-confidence reading Tuesday morning.

The Conference Board’s closely followed index of consumer confidence edged up to 129.1 this month from a revised 128.9 in June, hitting a 16-month high.

“The consumer is the backbone of the economy,” said Michael Reynolds, vice president of investment strategy at Glenmede, in a phone interview Tuesday. While economic and corporate earnings growth may have peaked, slower but “more sustainable” growth following the sharp rebound in the pandemic can continue to “reward” stocks, according to Reynolds.

As for Tuesday’s decline in equities, “the market is just catching its breath after a couple days of really ripping higher,” he said.

But some investors do fear that the selling in Asia may dim the shine of a strong U.S. corporate earnings reporting season thus far.

“This crackdown on private businesses from China is significantly denting market sentiment despite a better-than-expected earnings season so far,” said Pierre Veyret, technical analyst at ActivTrades.

See: How China’s stock-market meltdown puts U.S. investors at risk

Meanwhile, the Federal Reserve began its two-day policy meeting. Policy makers led by Chairman Jerome Powell are expected to have a lengthy discussion this week about eventually slowing down their monthly bond purchases, but Fed watchers said the meeting is unlikely to produce answers to questions about the likely start or pace of any tapering effort.

Read: Watch for the Fed to tiptoe toward tapering this week

In other U.S. economic data, orders for durable goods rose 0.8% in June, well below the 2% rise expected by economists. May orders, however, were revised to show a 3.2% rise versus an initial estimate of 2.3%.

The S&P CoreLogic Case-Shiller Home Price Index showed a 16.6% year-over-year rise in May, up from the previous record of 14.8% set last month. The separate 20-city index, which gauges home prices across a group of major cities across the country, increased over the past year by 17% in May, up from 15% in the prior month.

See also: IMF warns the world economic recovery is not assured until the pandemic is ‘beaten back’ globally

After the close Tuesday, U.S. tech giants Alphabet GOOG, Apple AAPL and Microsoft MSFT reported quarterly results. Analysts said positioning ahead of tech earnings could also help account for the underperformance of the tech-heavy Nasdaq Composite relative to other major indexes Tuesday. So far, 88% of S&P 500 companies have reported a positive EPS surprise, according to FactSet

Earnings Outlook: Apple, Microsoft, Google, Facebook, Amazon and Tesla headline the biggest week of earnings

Which companies were in focus?
What did other markets do?
  • The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    1.246%

    fell 4.1 basis points to settle at 1.235%. Yields and debt prices move in opposite directions.

  • The ICE U.S. Dollar Index
    DXY,
    +0.01%
    ,
    a measure of the currency against a basket of six major rivals, was down 0.2%.

  • Oil futures lost ground, with the U.S. benchmark
    CL00,
    +0.68%

    ending 0.4% lower Tuesday at $71.65 a barrel, while gold futures
    GC00,
    +0.38%

    settled less than 0.1% higher at $1,799.80 an ounce.

  • In European equities, the Stoxx 600 Europe index
    SXXP,
    -0.54%

    fell 0.5% and London’s FTSE 100
    UKX,
    -0.42%

    lost 0.4%.

Mark DeCambre and Steve Goldstein contributed to this report.

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