* Dow up ~0.7%, S&P 500 edges down, Nasdaq slides >1.5%
* Utilities lead S&P sector gainers; tech weakest group
* Dollar ~flat; gold, crude rise slightly
* U.S. 10-Year Treasury yield ~1.60%
May 10 - Welcome to the home for real-time coverage of
markets brought to you by Reuters reporters. You can share your
thoughts with us at markets.research@thomsonreuters.com
BIG TECH FACES REGULATION AND TAX THREATS, GOLDMAN
WARNS(1345 EDT/1745 GMT)
With Wall Street continuing to rely on Big Tech to lead
earnings growth, Goldman Sachs is warning about threats to the
widely owned group, including regulation and rising tax rates.
Apple, Amazon.com, Microsoft,
Facebook and Google-partner Alphabet, which GS
chief equity strategist David Kostin calls the FAAMG group, now
represent 21% of the S&P 500's market cap and account for 22% of
total S&P 500 capex and R&D spending. The largest five S&P 500
components at the peak of the Y2K tech bubble accounted for 18%
of the S&P 500, leading some investors now to wonder whether a
reversal is in store, Kostin writes in a research note.
The greatest risk to the FAAMG group may be regulation,
according to Kostin.
"Recent Biden administration appointments suggest some risk
of a stricter regulatory regime and tighter antitrust
enforcement," he warns. "With the exception of MSFT, the other
four FAAMG stocks face a laundry list of legal battles and
investigations over their market power and competitive
practices."
Higher tax rates also represent an outsized threat to the
group. If fully enacted, President Joe Biden's proposed
corporate tax plan would shave 9% off of FAAMG earnings, Kostin
writes.
If Biden's proposed maximum capital gains tax rate becomes
set for implementation next year, FAAMG stocks could see high
levels of selling in 2021 as investors lock in the current,
lower tax rate.
FAAMG stocks appreciated by $5 trillion over the past five
years, accounting for 29% of the S&P 500's market cap increase
over that period, according to Kostin.
(Noel Randewich)
*****
CHIP STOCKS TUMBLE ACROSS THE BOARD (1222 EDT/1622 GMT)
Chip stocks are tumbling on Monday, with losses across the
sector, including drops of more than 4% in Qualcomm and
Lam Research.
Intel Corp and Nvidia are falling about 2%
each. Intel rallied in January after it announced it was
appointing veteran Pat Gelsinger as CEO to help the company
navigate its way out of a manufacturing crisis, but early
enthusiasm about Gelsinger, who spent 30 years at Intel before
becoming CEO of VMware Inc, appears to be fading.
Atlantic Research on Sunday downgraded the chipmaker to
"underweight" from "neutral", with analyst Ianjit Bhatti writing
in a client note that Gelsinger's manufacturing strategy is
unlikely to reverse share losses to smaller rival Advanced Micro
Devices.
The Philadelphia Semiconductor Index is down 2.7%,
leaving it up just 8% in 2021, although the index remains up
about 70% over the past 12 months, with demand for
semiconductors far outstrippping supply in a global component
shortage.
In a client note on Monday, Jefferies analysts pointed to
the growth in data center chips based on ARM architecture, along
with the ongoing global chip shortage, as reasons to remain
bullish on semis. They said they continue to favor Microchip
Technology, Nvidia, Marvell Technology and
Analog Devices.
Microchip Technology is off 1.9%, giving back much of its
rally on Friday after the company reported its quarterly
results, with CEO Ganesh Moorthy saying that in his 40 year
career, "I cannot recall a time when the imbalance between
supply and demand has been more acute."
Underscoring recent volatility in chip stocks, Monday's drop
in the SOX index was on track to be the steepest in only six
sessions.
(Noel Randewich)
*****
ICEBERG AHEAD! NAVIGATING THE MID-CYCLE TRANSITION (1110
EDT/1510 GMT)
Michael Wilson, Equity Strategist at Morgan Stanley (MS),
believes the market is entering what he calls the "mid-cycle
transition."
Wilson has been getting more concerned about several factors
including execution risk and what's priced in. Indeed, in
mid-March, given his concerns, Wilson says he downgraded small
caps and early-cycle stocks like consumer discretionary, while
he upgraded consumer staples, and "suggested a move up the
quality curve." At the same time, MS held to a reflationary
bias, with overweights in financials, materials and industrials.
Wilson says peak rate of change and execution risk are
normal as we exit the early stages of a recovery and enter the
mid-cycle transition. He sees past cycles in 1994, 2004 and 2011
as comparable years to where we are now, and therefore he thinks
2021 will be similar for investors – "flattish returns for the
year with a 10-20%+ correction along the way."
That said, Wilson thinks that whatever correction the market
endures this year, it is likely to make higher highs next year.
"The goal as an investor is to navigate the mid-cycle
transition, avoid the stocks with the biggest drawdowns and be
in position to capture the next leg."
Indeed, Wilson believes the first stage of that transition
appears to be well along – i.e., "taking out the most
egregiously valued stocks as rates moved higher."
Wilson notes that small caps, early-cycle stocks like chips
and lower-quality stocks are now underperforming, along with
some reopening plays that got extended. And Wilson believes that
before the transition is complete, the S&P 500 is likely to feel
it too.
(Terence Gabriel)
*****
DOW HEADS NORTH, NASDAQ GOES SOUTH (1010 EDT/1410 GMT)
Major U.S. indexes are mixed in early trade with the Dow
Jones Industrial Average on track for a 4th straight
record close, while the Nasdaq Composite is losing more
than 1% and threatening last week's lows.
This as optimism that interest rates would remain lower for
longer lingered, while a surge in commodity prices lifted shares
of miners, energy and steel companies.
Energy is the top performing S&P 500 sector after a
cyberattack forced the shutdown of a U.S. fuel pipeline that
transports nearly half of the East Coast's supplies, initially
lifting oil prices. That said, crude is now down on
the day, and a 3-2-1 crack spread (Refinitiv data), a rough
calculation of refining margins, after jumping more than 11%, to
its highest level in more than a year, is now only up around 3%
on the day:
FANGs, chips, and tech are among
the losers.
Here is where markets stand in early trade:
(Terence Gabriel)
*****
NASDAQ COMPOSITE: TOUGH TO BUILD ON A WEAK FOUNDATION (0900
EDT/1300 GMT)
The Nasdaq Composite has broken down over the past
several weeks. That said, as of Friday's close the tech-laden
index is only off around 3% from its April 26 record close.
Of note, however, this weakness is in the wake of a severe
breadth/momentum divergence:
Indeed, the Nasdaq McClellan Summation (McSum), a
breadth/momentum measure based on advancing and declining
issues, which hit an all-time high in mid-February, collapsed to
its lowest level since early October, on April 22.
With the Composite's late-April strength, this measure
failed to even exceed its high from earlier in that month. The
McSum has since broken below its 10-day moving average again and
is threatening its recent trough.
Just since late 2018, six significant Nasdaq selloffs,
averaging around 16%, were preceded by McSum divergence. The
McSum does have support in the -2,553/-2,598 area, but that zone
is well below Friday's -1,910 close.
Thus, if the Composite continues to crumble under the
surface, it may remain vulnerable to a more protracted and
deeper decline.
(Terence Gabriel)
*****
FOR MONDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300 GMT
- CLICK HERE:
(Terence Gabriel is a Reuters market analyst. The views
expressed are his own)