Why the Stock Market Is Dropping and How It Could Bounce Back

The
S&P 500
was hit hard too because the Magnificent Seven stocks that have powered this year’s market rally—
Apple
(AAPL), Amazon, Alphabet, Meta, Microsoft,
Nvidia
(NVDA), and
Tesla
(TSLA)—account for more than a quarter of the index. That market benchmark closed below the 4200 level for the first time since June.

Solita Marcelli, UBS Global’s chief investment officer for the Americas, wrote that the “average one-day move for the Magnificent Seven was -3.4% on Wednesday.” Disappointments about tech earnings have captured the headlines, she said, even though third-quarter results at some 80% of companies have exceeded expectations.

It wasn’t just earnings, however. The yield on the 10-year Treasury note was just below the 5% level. Higher payouts on risk-free government debt not only mean fewer investors want to gamble on stocks, they also reduce the current discounted value of the future earnings that underpin high prices for tech and other fast-growing companies.    

At the same time, oil prices have risen in response to the war between Israel and Hamas.

Jonas Goltermann, deputy chief market economist at Capital Economics, wrote that while investors now expect that the conflict will have a limited impact on financial markets, that may change.

“The key concern around the Hamas-Israel conflict is therefore that it may widen to involve Iran, an ally of Hamas and a major energy producer,” he said. “With both the oil and LNG markets already very tight, we think that if such a scenario came to be seen as likely, the uncertainty alone could send the oil price well above $100 a barrel, at least temporarily.”

Finally, while the House of Representatives has a new speaker at long last, it wasn’t the kind of victory to crow about.

“[M]arkets (and the economy) expect Congress to act with some minimum level of competency,” wrote Sevens Report President Tom Essaye. “Setting new highs in incompetence (as has happened over the past three weeks) and then simply returning to minimally competent isn’t enough to create a sustainable rally in stocks, especially when they are facing numerous headwinds.”

Stocks were lower again Thursday, partly because gross domestic product grew surprisingly fast in the third quarter—one more blow to dwindling hopes that the Federal Reserve will feel compelled to lower interest rates soon.

All of that points to the likelihood that the rally that powered equities in the first half of the year will remain on hold. Investors might have to readjust to the idea of the market grinding lower, or stumbling sideways, rather than shooting higher in the near term.

Still, there could be reason to believe that even if the rally won’t resume, further pain might be limited. According to Craig Johnson, chief market technician at
Piper Sandler,
with the S&P 500 testing its prior resistance around 4200 and the Nasdaq around its 200-day moving average of 12767, these indexes should get some support.

In addition, his firm’s proprietary market-breadth indicators are “sitting at prior oversold extremes,” he wrote. That factor, “coupled with waning momentum in 10- year bond yields should limit further downside in equities and allow bulls to regain control soon.”

In other words, he said, it’s always “darkest before the dawn.” Let’s hope so.

Write to Teresa Rivas at [email protected]