Stocks Power Ahead on Tech Rally

Stocks rebounded after their worst week since April as investors looked beyond Joe Biden ending his reelection campaign to focus on the start of the tech earnings season.

The megacap space rallied, with the Nasdaq 100 up almost 2%. Despite the recent slump that had some on Wall Street bracing for a summer correction, respondents to Bloomberg’s Markets Live Pulse survey expect earnings to reinvigorate the S&P 500.

With results from Tesla Inc. and Alphabet Inc. on deck Tuesday, nearly two-thirds of the 463 respondents to the questionnaire expect corporate profits to boost US equities.

Sky-high valuations and seasonal weakness have incited some pullback warnings, with traders also facing political uncertainties. Yet the market reaction to Biden’s decision to quit the race and endorse Kamala Harris has so far been fairly muted, with the U.S. dollar and Treasuries seeing small moves.

“This political shake-up shouldn’t materially alter the direction of the markets,” said Tom Essaye at The Sevens Report. “The ultimate direction of the S&P 500 will still be determined by economic growth.”

The S&P 500 rose 1.2%. A gauge of the “Magnificent Seven” megacaps rallied 2.7%, led by gains in Tesla and Nvidia Corp. The Russell 2000 of small firms added 1%. CrowdStrike Holdings Inc. tumbled amid the continued fallout from a faulty software update.

Treasury yields edged higher, setting the stage for this week’s readings on the economy as well as the Federal Reserve’s preferred inflation gauge. The expectation of a rate cut in September had boosted shorter-term maturities — narrowing the gap with longer-dated bonds — for much of July.

“Don’t get us wrong, the upcoming election will certainly still be a focus for everybody — including investors — over the coming months, but there will be times when their focus will move to other issues, said Matt Maley at Miller Tabak + Co.

To Peter Boockvar at The Boock Report, debts and deficits are going to continue to skyrocket regardless of who wins the election.

“If Trump wins, we’ll get a full extension of the 2025 tax cuts but a possible slew of tariffs, more protectionism and likely a weaker dollar,” Boockvar said. “If Harris wins (assuming she’s the nominee), some of those Trump tax cuts will not be extended and we’ll get only some tariffs but still a lot of protectionism and possibly a weaker dollar.”

“I think up until the election, markets are going to trade more so on the trajectory of inflation, earnings, the economy and what the Fed does,” he concluded.

Since 1928, the S&P 500 has advanced roughly 5% on average in the third quarter of election years, logging positive returns nearly two-thirds of the time during the July through September period, according to data from Bloomberg Intelligence. Its track record has been even better in times a sitting president was up for reelection, averaging a nearly 8% rise in those months.

Source: Ned Davis Research

Strategists at BlackRock Investment Institute are reiterating their conviction in U.S. equities after the S&P 500 logged its worst week in three months.

“We see pullbacks as an opportunity to lean into stocks,” team led by Wei Li wrote. “Looking through near-term noise” of small-cap rally, big tech is likely to keep driving returns as companies carry positive earnings results for the market, the strategists said.

After driving the rally in U.S. stocks for most of the year, big tech slammed into a wall last week. Investors rotated from high-flying megacap shares to riskier, lagging parts of the market, spurred by bets on Fed rate cuts and the threat of more trade restrictions on chipmakers.