S&P 500, Nasdaq-100 Face >5% Drop, 'Bear Flag' Alert by Wolfe

Key Takeaway

• Wolfe Research identifies "bear flag" patterns in S&P 500 and Nasdaq-100, signaling potential short-term rallies before further declines.
• S&P 500 could see a downside to 4,800 (~4.5% drop), Nasdaq-100 might fall to around 16,500 (>5% drop).
• Despite recent gains, these patterns suggest the uptrend may be a temporary relief in a broader market decline.

Market Sentiment Sours Ahead of Fed Decision

The U.S. stock market experienced a downturn as investors braced for the Federal Reserve's upcoming interest rate decision. The S&P 500 and Nasdaq Composite both recorded losses, with the S&P 500 dropping 0.3% and the Nasdaq following suit. Despite these declines, the Dow Jones Industrial Average managed a slight gain of 0.2%. This mixed market response reflects the anticipation and anxiety surrounding the Fed's policy announcement, with particular attention on whether interest rates will remain steady or if the central bank will signal a more hawkish future stance.

Earnings Disappointments Weigh on Tech

The technology sector faced significant pressure following disappointing earnings reports from key players. Advanced Micro Devices (AMD) saw a 7% decline after its revenue forecast merely aligned with expectations, failing to excite investors. Similarly, Super Micro Computer experienced a 16% drop due to revenue falling short of consensus estimates. These results contributed to the broader tech sector's struggles, underscoring the challenges facing the industry amidst high expectations for growth and profitability.

CVS and Starbucks Highlight Consumer Caution

CVS Health and Starbucks provided stark reminders of the challenges facing consumer-facing businesses. CVS Health's shares plummeted over 19% after the company reported disappointing earnings and slashed its profit guidance, marking its worst day since November 2009. Starbucks also faced a significant sell-off, dropping 16% after cutting its outlook in response to weaker-than-expected same-store sales. These developments highlight the impact of cautious consumer spending and rising operational costs on corporate performance.

Fed's Rate Decision Looms Large

Investors are keenly awaiting the Federal Reserve's rate decision, with widespread expectations that the central bank will maintain current interest rates. However, the focus will be on Fed Chair Jerome Powell's comments for hints about future policy directions. Recent economic data suggesting persistent inflation and a robust labor market have fueled speculation that the Fed may adopt a more hawkish tone, potentially tightening financial conditions further. This uncertainty adds to the market's volatility, as participants gauge the potential impact on investment strategies and economic growth prospects.

Street Views

• Rob Ginsberg, Wolfe Research (Bearish on S&P 500 and Nasdaq-100):

  "Equities ended the month on a sour note, as last week’s dead cat bounces stalled out beneath resistance. The near-term formations in the SPX and NDX are starting to resemble ‘Bear Flags’... our sense is that it doesn’t put up much of a fight."