Following last week’s steep sell-off of technology stocks, investors are bracing for further market turbulence at the start of this week, as they await several marquee corporate earnings reports and the results of the U.S. midterm elections.
Futures on the S&P 500, which allow investors to bet on the market before the official start of trading, rose slightly on Sunday night. In Asia, Australian stocks and Japan’s benchmark index fell slightly.
The moves follow sharp losses at the end of last week, fueled by a sell-off in some of the well-known technology companies that have helped boost the stock market to a series of record highs in recent months.
Investors remain concerned about the amount of money the technology companies are spending to build the infrastructure to power artificial intelligence. Those concerns have intensified as companies have increasingly turned to debt markets to finance their spending, adding to the pressure on the companies should the immediate demand for A.I. fall short of expectations.
As companies have reported their financial results for the three months through September, investors have been paying particularly close attention to how much more money company executives think they will need to spend, balancing it against whether revenues have grown sufficiently from the money the companies have already spent.
Alphabet, Meta, Oracle and Amazon, which together account for four of the five “hyperscalers” driving the A.I. buildout, have all seen revisions to their lofty valuations in recent weeks, with investors punishing any appearance of profligacy. The average tech company has fallen 3 percent the day after it reported earnings for the three months through September, by far the worst tech performance of any quarter since Jefferies, an investment bank, started tracking the data 12 years ago.
“Said another way, downside moves have been far more exacerbated than upside moves,” said Jeffrey Favuzza, an analyst at Jefferies.
Apple and Palantir both report earnings after the stock market closes on Monday. Advanced Micro Devices, a chip designer similar to the behemoth Nvidia, reports on Tuesday.
Other, smaller semiconductor companies also report earnings this week, which will help give investors a broader sense of the health of the industry. The Philadelphia Semiconductor Index fell over 15 percent in October and is 27 percent below its record high in June, deep into a bear market, defined as a loss of 20 percent or more from a recent high.
Some analysts think the sell-off has now run its course, and that the technology sector is due for a rebound.
“The risk-reward is now in favor of tech again,” analysts at Deutsche Bank wrote in a research report at the end of last week.
Slowing A.I. growth expectations have helped lower longer-dated interest rates, with the 10-year Treasury yield, which underpins borrowing costs across corporate and consumer debt, falling below 5 percent last week, from a peak of 5.3 percent earlier in October.
The Treasury Department will release its latest borrowing projections this week, with many investors expecting the agency to at least discuss the potential for reducing the size of longer-dated bond sales. That would lower the supply of new bonds for investors to buy, which, in theory, should help pull government interest rates — and therefore yields — down further.
But some analysts warn that this could also create volatility in the government bond market if investors are disappointed by what the Treasury proposes.
Then there are Tuesday’s midterms. If the Democrats gain a majority in either the House or the Senate, investors expect them to rein in President Trump and possibly slow economic growth at the same time; a Republican victory would likely mean the administration would enable the administration to continue with its agenda.
But historically, such policy predictions and how they will affect financial markets tend not to matter. Investors mostly like the clarity that the results of political elections bring with them.
According to the Franklin Institute, the S&P 500 has averaged a 14.9 percent gain over the 12 months after a midterm election, based on the 10 midterms under a Republican president since 1954, with similar market moves regardless of whether Republicans or Democrats take control of Congress.
“Investors have a tendency to believe that politics heavily influence equity markets,” said Chris Galipeau, head market strategist at Franklin Institute. “The reality is quite different historically after midterm elections.”
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