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📉 The S&P 500 Just Had Its Worst Week Since April As Big Tech is Hit Hard

😰 The markets were hit hard this week, with the S&P 500 falling -2.4% (losing $1.3 trillion in market cap) in its worst week since April.

📉 The biggest losers were big tech, with the Magnificent 7 stocks falling from around -4% to -10% (the Mag 7’s worst day in over a year). Tesla ($TSLA) and Nvidia ($NVDA) were hit the hardest, falling -6.5% and -9.8%, respectively.

📈 While certainly a rough week, the S&P is still up over 16% year-to-date (already higher than its average of +12.6% over the past 10 years), and Nvidia is still up +145%. So let’s unpack the week’s events and try to determine if this is just a small correction or a warning sign of hardship to come…

💸 Inflation was a big driver, falling for the first time since 2020

One of the big catalysts for the recent drop was the June inflation report, with CPI declining -0.1% for the first time since May 2020.

Analysts estimate that this increases the chance the Fed will begin reducing interest rates in September from 75% to over 89%.

So why would this cause a sell-off in big tech? Well the answer lies in taking a step back and looking at the big picture…

🔄 Rotation from Big Tech to Small-Caps, Real-Estate and Value Stocks

If you look just at Big Tech, the week looks rough - but many other sectors like Small-Caps, Real Estate, and Value Stocks did very well, with many commentators calling it more of a ‘rotation’ to other sectors:

• 📊 The Russel 2000 small-cap index is up +1%

• 👴🏻 Warren Buffet’s Berkshire Hathaway ($BRK) is up +2.1% (despite Apple being its biggest holding)

• 🏠 Real-Estate like BMO’s Equal Weight REIT ETF ($ZRE) is up +1.4%

• 🏦 TD Bank ($TD) is up +2.3%

• 🛢️ Enbridge ($ENB) is up +1.7%

💡 For many, this correction is a welcome change from a market where a handful of stocks have dominated and is a helpful reminder of the importance of diversification!

🤖 Does This Mean Big Tech Falling Out of Fashion?

Even with the recent rotation, many think Big Tech will continue to climb, with profit expectations at record highs.

Many parallels have been drawn between now and the Dot-Com bubble 24 years ago, but one of the most interesting charts I’ve seen on this was from ‘Asking for a Trend’ on Yahoo Finance:

Essentially, it shows that while the S&P 500's concentration in big tech is at an all-time high, forward earnings as a percentage has mostly kept up, and the difference between the two is much less than it was during the dot-com bubble.

In plain language, this means that while stock prices are at record highs, so are forward earnings.

However this also means current stock prices are heavily reliant on the companies’ ability to meet these forward earnings expectations, and the bar is high for the upcoming earnings season.

Luckily (or unluckily), we won’t have to wait long to find out, with Big Tech earnings season kicking off on Tuesday, July 23 with Google and Tesla.

💰 Still lots of cash on the sidelines

If earnings come out strong, another factor that could drive up stocks (both tech and other sectors) is the amount of cash that is on the sidelines.

According to the visual capitalist, a record $6T in assets is sitting in cash, with over $2T from retail investors. As interest rates fall, some analysts expect some of these funds to get redirected to the market.

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ANNOUNCEMENT
🤯 CrowdStrike Plummets 18% After Crashing Computers Across the World

In what may go down as the most catastrophic IT failure in world history, CrowdStrike ($CRWD) - an American cybersecurity company - made a faulty update that crashed 8.5M Windows devices. Here were some of the impacts of the outage:

• 🛬 Over 7,000 flights canceled globally, 6.2% of all scheduled flights

• 🚨 911 services in New York, Alaska, New Hampshire, and Texas were down temporarily

• 🏥 Critical electronic medical record systems (EMR) were down in hospitals across the world, causing delays and canceled procedures

• 🏦 Thousands of JPMorgan ATMs stopped working and TD clients lost access to their accounts

• 🦹 Hackers took advantage of the outage for phishing and other malicious activities

• ☕️ Worst of all, Starbucks mobile ordering was disrupted, causing longer lines

😰 CrowdStrike Stock Down 18%, Will it Continue Falling?

🤔 With nearly 400 folks in the Blossom community holding the CrowdStrike stock ($CRWD) - ranking as the #11th most held technology stock in the US and the #30th most held in Canada - I’m sure many of you are wondering if the worst is behind us. And folks on the sidelines might be wondering if this is a good buying opportunity…

😥 First off, the bad: the outage will have an immediate and large business impact, eroding client trust:

• ❌ Clients’ trust has been eroded and will take a long time to repair, with Elon Musk even mocking the company on Twitter and deleting CrowdStrike from all systems

• ❌ CrowdStrike has a quarter end in July, so this comes at an exceptionally bad time as the company will likely be in the process of finalizing deals for the end of the quarter, putting pressure on this quarter’s earnings

• ❌ This may reverse a growing trend in the cybersecurity market to consolidate business with one vendor, as it demonstrates the importance of cyber-diversification

• ❌ Impacted businesses will likely aim to take legal action on CrowdStrike which at the least will require legal expenses to defend the company and may require compensation to settle customer lawsuits

• ❌ Even with the drop, CrowdStrike still has a rich valuation, with a forward P/E of 85. The stock is still up over 100% over the past year

📈 Despite these struggles, according to some analysts, the drop may present a buying opportunity. Here’s why:

• ✅ Other tech players like Amazon and Microsoft have faced major outages and remain a key part of the architecture

• ✅ The update doesn’t represent a breach of CrowdStrike’s security operation, and within hours of the outage, companies were able to gradually resume services

• ✅ Based on CrowdStrike’s Terms and Conditions, many analysts believe CrowdStrike is likely not contractually liable for the impacts of the outage

• ✅ Some analysts say CrowdStrike has a limited risk of customers switching to competitors as the company “commands best-in-class endpoint security, and customers know it”

Overall, analysts mostly agree that even if there is a long-term opportunity, in the near to medium term, the aftermath will take time to clean up and bounce back from.

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FROM THE BLOSSOM COMMUNITY
🎙️ Top Discussions this Week

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