The largest technology stocks have been a key force buoying the S&P 500 this year, helped by the investor frenzy over artificial intelligence. But tech giants could actually be the next risk for the stock market, according to J.P. Morgan.
Stocks have been in a bit of a rut, with the
Dow Jones Industrial Average
and
S&P 500
down 6.5% and 7% respectively in the past three months. Much of that can be blamed on the macroeconomic backdrop—look to the Federal Reserve and worries over interest rates. But technical market analysis can also be illustrative, as it predicted a late-in-the-year slump that may not be over yet.
“While some indexes have already hit our 4Q bearish objectives, we don’t see enough evidence to fade weakness,” J.P. Morgan analysts Jason Hunter and Marko Kolanovic wrote in a Tuesday note. “Mega cap threatening key pattern support still poses a material risk.”
Indeed, while the mega caps—tech stocks like
Apple
(ticker: AAPL),
Microsoft
(MSFT),
Meta
(META), and
Nvidia
(NVDA)—have been a major source of support for the market this year and drove stocks higher, these names may now be vulnerable. Since mega cap stocks are so heavily weighted in the major stock indexes, that could spell trouble more broadly.
The S&P 500, for its part, has covered much of the distance between its summer peak at 4,607 points and J.P. Morgan’s base-case target zone around 4,100—the index closed at 4,247 on Tuesday. But that doesn’t mean a rebound is coming.
“Absence of deep oversold sentiment readings and other signs of capitulation, the threatening setup for indexes that are likely crowded with long positions accumulated during the summer, and the broader cross-market signaling that in the past have preceded bear markets associated with recession make us hesitant to suggest playing for a fourth-quarter rally,” said Hunter and Kolanoivic.
“We would rather wait to see if mega cap indexes break nearby support and see what type of selling pressure creates before entertaining a tactical long trade strategy,” they added.
The analysts took a look at the
NYSE FANG+
index, which includes the biggest tech stocks. The index is “one of the lone survivors” that hasn’t broken months of support, Hunter and Kolanovic said, but they now view a break through the downside support levels as “inevitable”.
That could “lead to a rapid repricing and another leg of bearish price pressure,” the team at J.P. Morgan said. “Weakness in crowded mega cap indexes can re-accelerate the broad market slide.”
It’s just one more reason for investors to be laser-focused on tech earnings this week.
Write to Jack Denton at jack.denton@barrons.com
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