In the current year, the S&P 500 has been riding high, propelled by the surge of interest in artificial intelligence. Unsurprisingly, it is the tech behemoths that have been at the helm of this upward trend. However, J.P. Morgan analysts are raising concerns that these very giants might pose a significant risk to the stock market.
Over the past three months, the stock market has been experiencing a slight downturn, with the Dow Jones Industrial Average and S&P 500 witnessing declines of 6.5% and 7% respectively. While global economic conditions, particularly concerns over interest rates and the Federal Reserve's actions, have played a part, a closer look at technical market analysis reveals that there might be more to the story.
J.P. Morgan analysts Jason Hunter and Marko Kolanovic highlighted in a note on Tuesday that although some indexes have already reached the bearish objectives set for the fourth quarter, they do not yet see sufficient evidence to suggest that the weakness has abated. Their concerns center around mega-cap stocks, which are currently teetering on key pattern support, thereby posing a notable risk.
It is worth noting that mega-cap stocks such as Apple (AAPL), Microsoft (MSFT), Meta (META), and Nvidia (NVDA), have been instrumental in propping up the market and driving stock prices higher throughout the year. However, their once-indomitable position now appears to be under threat. Given their substantial weightings within major stock indexes, any weakness in these tech titans could potentially have far-reaching consequences.
The S&P 500 and the Potential for a Rebound
The S&P 500, which reached its peak at 4,607 points during the summer, has now retraced much of that distance. Currently closing at 4,247 points as of Tuesday, there are mixed opinions as to whether a rebound is on the horizon.
According to Hunter and Kolanovic, the absence of deep oversold sentiment readings and other signs of capitulation, along with the potential overcrowding of long positions accumulated over the summer, give cause for hesitation. Additionally, previous cross-market signals that have preceded bear markets associated with recessions further contribute to their cautious stance on suggesting a fourth-quarter rally.
Instead, they propose waiting for mega-cap indexes to break nearby support and observing the type of selling pressure that ensues before considering a tactical long trade strategy.
Taking a closer look at the NYSE FANG+ index, which consists of major tech stocks, Hunter and Kolanovic note that it has remained relatively resilient, unlike other indexes. However, they now anticipate an eventual breakthrough of downside support levels that could lead to a rapid repricing and another wave of bearish price pressure. This weakness in crowded mega-cap indexes might potentially accelerate the broad market slide.
Given these factors, investors have every reason to closely monitor tech earnings this week.
