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Tech in the Firing Line, Giving Some Benefit to the FTSE100

Published 22/04/2024, 08:28
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Technology stocks were in the firing line at the end of a testing week, with some of the recent froth being blown off after what has been a stellar rise for those stocks which have an AI slant.

Recent comments coming out of the semiconductor sector have raised some concerns that the current expectations for limitless growth may have been overdone. After monumental share price rises over the last year or so, Super Micro Computer shares plunged by more than 23%, while the AI darling Nvidia (NASDAQ:NVDA) fell by 10%. The losses drove the Nasdaq to fall by more than 2% to not only end the week sharply lower, but also to pair its gains in the year to date to just 1.8%. At the same time, the disproportionate impact of mega cap tech stocks on the benchmark S&P500 also moved the index lower, shaving its gains so far this year to 4.1%.

The Dow Jones escaped the selling pressure and rose moderately in the session, propped up by a strong earnings report from American Express (NYSE:AXP), which lifted the shares over 6%. Even so, the recent weakness which has been precipitated by evaporating hopes for an immediate interest rate reduction and geopolitical concerns has left the Dow ahead by just 0.8% this year. While some of the immediate fears of an escalation in the Middle East were soothed following Iran’s statement that it had no plans for a retaliatory attack, which also resulted in a decline in the oil price, the general fragility of tensions in the region remains close to the surface and is clearly playing on investors’ minds.

The general backdrop has led to increasing focus on the corporate earnings seasons, where there is pressure for companies to match expectations given some of the stretched valuations which have resulted from earlier market gains. Among a raft of companies reporting this week are the majority of the Magnificent Seven, namely Tesla, Alphabet (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT) and Meta Platforms, with any earnings misses or cautious guidance statements likely to be punished. Elsewhere, the likes of General Motors (NYSE:GM), Ford, Boeing (NYSE:BA), AT&T (NYSE:T) and Exxon Mobil (NYSE:XOM) will keep investors busy in translating the level of earnings to the current state of the nation in investment terms.

Asian markets were mixed to positive overnight, with some earlier weakness in chip sector shares being largely offset by the apparent de-escalation of tensions in the Middle East. Nonetheless shares in China were broadly lower, as the authorities left their prime rates unchanged, which was enough to outweigh some previous optimism following the announcement that overseas investment in the tech sector would be promoted. The road to recovery for the Chinese economy is proving to be bumpy, with many investors having fled the country to concentrate on other regions such as Japan in recent months.

Given its lesser reliance on tech stocks, the FTSE100 powered ahead in early exchanges, in an echo of the market moves of 2022 when high growth shares were eschewed in favour of more stable, defensive and value stocks, all of which are to be found in abundance in the UK’s premier index.

Meanwhile, the week ahead is one which is littered with any number of corporate earnings, not least of which are first quarter numbers from Lloyds Banking (LON:LLOY), Barclays (LON:BARC) and NatWest (LON:NWG). The recent pick up of corporate activity as reported by the likes of Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) bodes well for Barclays in its investment banking arm, while the general pressure that was heaped upon the US banks in terms of Net Interest Income could also feature on this side of the pond. However, the strength of the UK banking sector could also result in further focus on shareholder returns, with the possibility of higher dividend payments and share buybacks likely to underpin sentiment if announced. There could also be some kind of update on the rumoured NatWest offer to retail investors, which had previously been rumoured to be taking place in the summer.

Elsewhere, the retail and housebuilding sectors will also be scrutinised in what has been a patchy period of late for both, with updates from Primark owner Associated British Foods (LON:ABF), Persimmon (LON:PSN) and Taylor Wimpey (LON:TW). In the meantime, the retail sector more broadly soared in early trade after a raft of broker upgrades to the likes of Marks & Spencer, Sainsbury, B&M European and Next, with Ocado (LON:OCDO) also rising by association. The early strength of the main indices leaves the FTSE100 ahead by 3.3% so far this year, while a sprightly opening for the FTSE250 has reduced its loss to just 0.8%.

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