• S&P 500 and Dow Jones close at new peaks but Nasdaq stutters
• Fed rate cut boosts risk appetite, China stimulus further lifts sentiment
• But tech stocks are mixed as AI rally cools, earnings doubts creep in

The bulls return from summer hiatus

After a prolonged period of unusual calm in the markets, volatility was back with a vengeance during the summer and autumn got off to an equally bumpy start. But although September is historically a bad month for stocks, Wall Street appears to be shrugging off the jitters that led to a roughly 10% correction in the S&P 500 and a 15% drop in the Nasdaq between July and August.

The Dow Jones and S&P 500 have not only recouped their losses but are also trading at new all-time highs. The Nasdaq 100 remains some 3.5% off its record peak. But this divergence isn’t totally unexpected.

Tech stocks become laggards

Many non-tech and small-cap stocks were left behind after the initial post-pandemic rally fizzled out in 2021, so these are now relatively more attractive from a valuation perspective and as the Fed starts to lower rates. Whereas mega caps were very much in the driving seat in the bullish phase that started in October 2023, particularly stocks associated with the boom in artificial intelligence (AI). 

But with tech valuations already stretched and investors questioning all the spending on AI even before recession worries resurfaced, tech stocks haven’t been having such an easy ride lately. The Fed’s decision to slash interest rates by a larger 50 basis points and the clear signal that more cuts are on the way have injected some fresh impetus to the Nasdaq. But the index barely managed to plot a higher high and the performance among the Big Tech has been very mixed.

Rate cuts, China stimulus offset earnings angst

Caution ahead of the upcoming earnings season is probably a major factor in keeping some potential buyers on the sidelines. Estimates of earnings growth for the third quarter currently stand at 4.6% y/y according to FactSet, which is down from earlier forecasts of 7.8% and down from 11.3% for Q2.

For now, however, expectations of further rate reductions by the Fed and other major central banks are enough to maintain the positive momentum. Interest-rate sensitive sectors such as homebuilders and financials have been some of the biggest gainers.

China’s latest attempt at resuscitating its beleaguered property market and boosting domestic demand has further lifted spirits in equity markets this week. But the fact that the Magnificent 7 are no longer following in a straight line raises question marks about the sustainability of the latest upswing on Wall Street.

Magnificent 7 no longer an unstoppable force

Nvidia is one of the surprise stocks that lost its shine over the summer. The share price seems to be forming a second lower-low, although its year-to-date gains still stand at an astonishing 144%.

Apple is trading close to its all-time high from July, while Facebook parent Meta Platforms is one of the best performers this month, hitting a new record. Amazon is also surging, though it hasn’t managed to surpass its July record, but Alphabet is struggling amid its legal woes with Google Search’s market dominance.

Microsoft has also been underperforming somewhat as investors see the company’s lead in the AI race shrinking. This led to the stock receiving a rare downgrade on Monday when an analyst at DA Davidson lowered the rating from buy to neutral.

Risks ahead

More broadly, uncertainty ahead of the US presidential election on November 5 might also limit the gains for Wall Street indices. However, barring any nasty surprises with the elections or with the economy, the main danger ahead for equity markets is the possibility that the Fed won’t cut rates as aggressively as investors have priced in at the moment.