A Major Hit to U.S. Tech Stocks: American tech companies face a significant challenge as the Biden administration
considers imposing strict restrictions on exporting chips to China, leading to a substantial decline in these companies’ shares worldwide.

Content

Major Stock Indices

Global Pressures on Chip Manufacturing Companies

Decline in Market-Capitalization Weighted Indices

Strict U.S. Restrictions

Performance of Major Indices

Bond Market Movements

Difficult Situation for Major Companies

Weak Technology Performance

One Path

End of the Typical Bullish Window

Major Stock Indices

In this context, major stock indices on Wall Street recorded significant declines,
The S&P 500 index dropped by more than 1%, while the Nasdaq 100 index fell by 2.5%.
The giants’ index wasn’t spared, dropping by 3.5%, and the Russell 2000 index of small companies declined by 0.6%.
Wall Street’s “fear gauge” – VIX – rose to its highest level since early May,
reflecting the anxiety and tension in financial markets.
These developments come at a sensitive time as investors await the Federal Reserve’s decision on rate cuts,
increasing the state of anticipation and instability in financial markets.

Global Pressures on Chip Manufacturing Companies

Chip manufacturing companies faced intense pressure from the United States to Europe and Asia.
Strong American companies like Nvidia, Adv anced Micro Devices, and Broadcom Inc. caused the closely watched semiconductor index to drop by 6%.
Across the Atlantic, ASML Holding NV shares fell by more than 10%, even after the Dutch giant announced firm orders.
These moves followed a decline in Tokyo Electron shares, which in turn led to a drop in Japan’s Nikkei 225 index.

Decline in Market Capitalization Weighted Indices

Wednesday’s events repeated the recent trend of market-capitalization-weighted indices performing
much worse than mid-cap stocks due to the weakness of large-cap companies dominating these indices.
Since companies like Apple and Microsoft make up 7% of the S&P 500 index,
it is hard to offset the losses even when most index components rise, as happened today.

-Strict U.S. Restrictions

President Joe Biden’s administration informed allies that it is considering imposing strict restrictions
if companies like Tokyo Electron and ASML continue to grant China access to advanced semiconductor technology.
The United States is also considering imposing more sanctions on specific Chinese chip companies linked to Huawei Technologies.
Matt Maley from Miller Tabak + Co said, “This chip sector-related news is an unexpected event that can trigger sell-offs,
which in turn could be a catalyst for a tradable correction in the stock market,”
adding that the indices “have become significantly overbought.”

Performance of Major Indices

The S&P 500 index dropped by more than 1%, while the Nasdaq 100 index fell by 2.5%.
The giants’ index (the magnificent seven, i.e., Meta, Amazon, Tesla, Apple, Nvidia, Alphabet, Microsoft) dropped by 3.5%,
and the Russell 2000 index of small companies declined by 0.6%.
Wall Street’s “fear gauge” – VIX – rose to its highest level since early May.
Among the few chip manufacturers that defied the sell-off were Intel and GlobalFoundries Inc.
The Dow Jones Industrial Average rose for the sixth consecutive day, setting another record,
with financial stocks outperforming, boosted by strong results from U.S. Bancorp.

Bond Market Movements

The bond market saw small movements.
The Federal Reserve’s Beige Book showed slight economic growth and a slowdown in inflation.

The highlight speaker on Wednesday was Governor Christopher Waller,
who said that the Federal Reserve is close to cutting interest rates but has yet to reach that point.
The yen led gains among major currencies, rising by about 1.5%.

Difficult Situation for Major Companies

The Biden administration faces a delicate situation,
as American companies feel that export restrictions to China have unfairly punished them and are pushing for changes.
Meanwhile, allies need more reason to change their policies just a few months before the presidential election.
Strategists at Bespoke Investment Group said, “Usually, the impact of this kind of news isn’t long-lasting,
but in this case, we note that chip companies’ performance
has lagged the broader market over the past two weeks so far,”
adding, “So this is something to watch.”

Weak Technology Performance

The weak technology performance comes after a first half in which giants like Nvidia, Microsoft,
and Alphabet pushed the market upward,
extending valuations for these companies and leaving them in a more challenging position for the rest of 2024.

One Path

But can the market continue to advance without tech companies?
Jose Torres from Interactive Brokers said,
“Most of the stock gains this year came from a few companies
currently facing a direct threat from the political arena.”
He added, “The important question is whether the rest of the market,
which generally lacks exciting stories on a relative basis,
can compensate for the diminishing momentum in the magnificent seven’s stocks.”
At Goldman Sachs, Scott Rubner says, “I’m not buying at lower prices.”
The tactical strategist bets that the S&P 500 index has no path but downward,
as Wednesday, July 17, historically marks a turning point for stock index returns, citing data back to 1928.
What follows, he says, is August, typically the worst month for passive outflows from stocks and mutual funds.

End of the Typical Bullish Window

Jonathan Krinsky from BTIG says the market “is approaching the end of the typical bullish window,”
noting that sentiments remain complacent about surveys and transaction indicators.
Krinsky said, “Although the shift from large tech stocks to cyclical and small-cap stocks is encouraging,
it seemed somewhat forced over such a short period.”
He added, “Even if this rotation is long-term,
we likely won’t see that new leadership until we see a higher correlation correction,
then see what could result from it.”

A Major Hit to U.S. Tech Stocks

A Major Hit to U.S. Tech Stocks

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