Update Equities: Market mood swings
Equities started the week on a cautiously optimistic note, building on prior momentum supported by generally solid earnings reports. Sentiment was tempered, however, by lingering uncertainty after US Federal Reserve Chair Jerome Powell signalled that further rate cuts this year are not guaranteed.
Positive market drivers included strong deal activity and sustained enthusiasm for artificial-intelligence (AI) infrastructure themes, although market breadth remained narrow.
The tone shifted sharply on Tuesday after major bank executives warned of the potential for a deeper correction in equities. This triggered a broad risk-off move: the S&P 500 index fell by about 1%, while the Nasdaq composite dropped by nearly 2%, with technology stocks bearing the brunt of the losses. Some losses were clawed back later in the week, but volatility underscored fragile confidence.
Sector performance reflected this rotation. Technology and semiconductors – the leaders of the recent rally – were at the centre of the pullback, while defensive sectors, such as health care and consumer staples, posted gains. Regionally, the sell-off was not confined to US markets. Asian equities declined sharply following Wall Street’s lead, and European benchmarks like the STOXX 600 mirrored the risk-off tone.
A telling micro-story was the decline in Palantir Technologies. Despite its issuing a strong outlook accompanied by great earnings, Palantir fell by more than 8% on Tuesday. This highlighted investor fatigue in AI-related names and heightened the focus on valuations. This episode underscores how sentiment now plays a critical role for growth stocks – positive forecasts alone may not be enough when the broader narrative turns cautious.
While this week’s swings highlighted the fragility of sentiment, they also reaffirmed the market’s ability to recalibrate quickly. As the earnings season continues and macroeconomic signals evolve, the next leg of the narrative could shift back and underscore that mood swings, much like markets themselves, move in both directions.