(Oct 8): A selloff in some of the world’s largest technology companies dragged down stocks, extending a slide that was also driven by geopolitical angst and bets the US Federal Reserve (Fed) will opt for a smaller rate cut next month.

The S&P 500 fell 1% after notching a four-week winning run. Alphabet Inc sank 2.4% as a judge ruled it must lift restrictions that prevent developers from setting up rival marketplaces that compete with its Google Play Store. Brent crude jumped above US$80 a barrel amid mounting tensions in the Middle East. In the wake of last Friday’s solid jobs data, Treasuries continued to drop — with the 10-year yield topping 4%.

“Last Friday’s strong jobs report not only appeared to kill any chance of a 50-basis-point rate cut in November, it kickstarted chatter about the Fed leaving rates unchanged if economic data continues to come in hotter than expected,” said Chris Larkin at E*Trade from Morgan Stanley. “But as last week showed, geopolitics can’t be ignored.”

To Dave Sekera at Morningstar, if there is any further geopolitical escalation, that would potentially spur the risk-off trade — with growth shares underperforming value ones.

“Typically, in a risk-off trade, you are going to see rotation into defence stocks, but I would be careful if you’re an investor today,” he said. “Some of the defensive sectors today are already overvalued. Unlike a typical risk-off trade, I think oil stocks would go up.”

With the exception of energy shares, every major sector in the S&P 500 dropped on Monday. A gauge of the “Magnificent Seven” megacaps slipped 1.9%. Amazon.com Inc sank 3.1% after Wells Fargo Securities downgraded the shares. Apple Inc slid 2.3% as a Jefferies analyst said investors have overly optimistic expectations for the latest iPhones. Nvidia Corp gained.

Wall Street’s favourite volatility gauge —  the VIX —  jumped to a two-month high. Treasury 10-year yields rose six basis points to 4.02%. West Texas Intermediate crude climbed 3.9% to US$77.30 a barrel.

Despite the drop in stocks, two of Wall Street’s top strategists have turned more optimistic on signs of a robust labour market, economic resilience and easing interest rates.

Morgan Stanley’s Michael Wilson raised his view on so-called cyclical stocks relative to safer defensive peers, noting last Friday’s blowout payrolls data and expectations of more cuts from the Fed. His peer at Goldman Sachs Group Inc, David Kostin, upgraded his 12-month target for the benchmark to 6,300 points from 6,000. The gauge closed at 5,695.94 on Monday.

Despite recent market volatility, strategists at BlackRock Investment Institute are reiterating their overweight to US equities and urging to lean into risk, citing cooling inflation and falling interest rates.

“The increasing probability that US economic performance will continue to be ‘hot’ going into 2025 and that the Fed will tolerate this heat, provided inflation isn’t reaccelerating, bodes well for risk assets,” said Jason Draho at UBS Global Wealth Management.

But navigating such an environment is not without challenges, he noted.

“The week ahead is a pivotal one for markets, with key consumer price index data and the start of earnings season, and we expect these events to confirm our bullish stance on markets and justify our expectations for the S&P 500 to reach 6,150 by year end,” said James Demmert at Main Street Research. “The strong jobs numbers from last Friday are a reminder to investors that the economy is vibrant, and recession risk is not a factor.”

Aside from the macroeconomic picture, traders will be wading through corporate results this week.

The third-quarter earnings season is expected to be fertile ground for investors who take an active approach to managing money, according to strategists at Bank of America Corp.

Options market is pricing in biggest post-earnings implied move at the single stock level in BofA data history since 2021, while S&P 500 Index volatility remains low, team led by Ohsung Kwon said on Monday in a note to clients.

“This upcoming earnings season is set to be a great environment for stock pickers,” he noted.

Financial sector earnings kick off on Friday — with reports from JPMorgan Chase & Co, Wells Fargo & Co and BlackRock Inc. Their net interest income outlook and capital markets revenue are in focus following September’s Fed rate cut, Bloomberg Intelligence said. 

Delta Air Lines Inc, the first major US airline to report this quarter, should provide further insight into travel demand following reports from Airbnb Inc and Booking Holdings Inc that flagged a pullback in vacation spending.

Uploaded by Jason Ng