S&P500 and Nasdaq 100: Bearish Tech Forecast Amid Rebalancing – What’s Next?

Tech Sector Struggles as Market Rotation Continues

The Nasdaq Composite edged lower on Thursday, extending its recent decline as investors continued to rotate out of technology stocks. This shift comes amid growing expectations of potential interest rate cuts by the Federal Reserve.

At 15:35 GMT, the Dow is trading 41035.22, down 162.86 or -0.40%. The S&P 500 Index is at 5551.46, down 36.81 or -0.66% and the Nasdaq 100 is trading 17791.34, down 205.59 or -1.14%.

S&P 500 Ends Record Streak

Wednesday saw the S&P 500 record its first decline of at least 1% in 52 consecutive trading sessions, marking the longest such streak since January 2020. The broad index fell 1.4%, with chipmakers identified as the main culprit for the slump.

Semiconductor Sector Under Pressure

The PHLX Semiconductor Sector Index tumbled 6.8% on Wednesday, significantly underperforming the broader market. Bank of America analyst Vivek Arya suggests this rout was likely driven by investor positioning rather than fundamentals, noting that artificial intelligence remains the strongest area of capital expenditures.

Market Rotation Favors Small Caps

As tech stocks struggle, small-cap stocks are gaining momentum. The Russell 2000 has jumped around 10% in the last five trading days, reflecting growing optimism surrounding these names. Charlie Ripley, senior investment strategist at Allianz, attributes this shift to expectations of Fed easing, which is seen as beneficial for small businesses.

Economic Data and Earnings

Initial jobless claims rose to 243,000 for the week ending July 13, higher than expected. Meanwhile, the Philadelphia Federal Reserve’s manufacturing index unexpectedly rose to 13.9 in July, indicating expansion in the sector.

Netflix Earnings in Focus

Investors are eagerly awaiting Netflix’s second-quarter results, due after market close on Thursday. Analysts expect earnings of $4.39 per share on revenue of $8.8 billion. The company’s recent move into live sports programming, including an NFL deal, has been viewed positively by some analysts as potentially attractive to advertisers on its new lower-cost advertising subscription tier.

Market Forecast

The current market rotation suggests a short-term bearish outlook for technology stocks, particularly in the semiconductor sector. However, the overall market sentiment remains cautiously optimistic, with small-cap stocks and companies benefiting from potential interest rate cuts likely to outperform in the near term.

Technical Analysis

Thursday’s price action clearly indicates investors have their sights set on the support zone formed by the 50% level at 19742.25 and the uptrending 50-day moving average at 19580.15. We expect to see a technical bounce on the first test of this area since many investors see it as value.

After that test, a bullish tone could develop on a sustained move over 19742.25. Conversely, a sustained move under 19580.15 could trigger an avalanche with early objectives including the 200-day moving average at 17962.79.