According to Wall Street's definition, a stock is considered to have entered a correction phase when it falls more than 10% from its high. Following Tesla and Apple's earlier adjustments, Nvidia also found itself mired last week. At the same time, the share prices of the other four of the tech "Seven Giants" - Alphabet, the parent company of Google, Amazon, Meta Platforms, the parent company of Facebook, and Microsoft - are all near their highs.

With the uncertainty of the Federal Reserve's monetary policy, the S&P 500 index is testing the support of short-term important moving averages, and changes in risk preference have also led to a resurgence in the scale of money funds with safe-haven attributes. For the U.S. stock market, which is about to enter the earnings season, how the market style will evolve next may determine the ultimate fate of this bull market.

Nvidia Falls into Correction Range

As the leader of this round of artificial intelligence trends, changes in Nvidia's performance have attracted widespread attention. Competition from rivals may be one of the challenges the company faces. Intel recently released a new artificial intelligence chip called Gaudi 3, aimed at powering large language models. Intel stated that the energy efficiency of this new chip is more than twice that of Nvidia's most advanced H100 GPU, and it runs artificial intelligence models at 1.5 times the speed of Nvidia's GPU.

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D.A. Davidson analyst Gil Luria holds a cautious stance on Nvidia's long-term prospects. "The company should achieve brilliant performance in 2024 (perhaps by 2025), but recent trends will lead to a significant cyclical downturn before 2026," he said in a report to clients. "The shrinking pattern, more stable demand growth, mature scale investments, and the increasing dependence of its largest customers on self-developed chips are not good omens for the next few years for (Nvidia)."

On the other hand, with the U.S. Department of Justice and the European Union launching antitrust investigations into companies including Apple, Google, and Meta, potential regulatory risks may alert investors to large technology companies.

A recent global fund manager survey released by Bank of America Global shows that being long on the tech "Seven Giants" remains one of the most crowded trades currently. However, market divisions have emerged. Regarding whether there is a bubble in artificial intelligence, 40% of respondents chose yes, and 45% believe there is not. Data provided by the London Stock Exchange Group (LSEG) to First Financial also shows that last week's large-cap fund sell-off reached $5.28 billion, the highest since January 10th this year.

"This market was overdue for a pullback."

The adjustment since April has caused the S&P 500 index to fall below the 50-day moving average, an important trendline, for the first time in five months, suggesting that the stock market's rebound is facing a critical moment. From a technical perspective, if the index effectively breaks below this short-term moving average, it could signal a further decline in the future. Since bottoming out in October last year, the S&P 500 index has rebounded nearly 25% in this bull market.

Craig Johnson, Chief Market Technician at Piper Sandler, said that for many on Wall Street, a moderate pullback is largely benign, even welcome. The recent rebound was initially boosted by expectations of significant rate cuts by the Federal Reserve in 2024, which seems unlikely after the Consumer Price Index (CPI) has consistently exceeded expectations. "I've always said that this market was overdue for a pullback."From the perspective of deviation, the strength of this round of the U.S. stock market rebound is also unprecedented. According to data from Bespoke Investment Group, driven by large-cap technology stocks, the S&P 500 Index has exceeded a one-standard-deviation deviation from the 50-day moving average for 53 consecutive trading days, the longest duration since 1998.

Now, a significant amount of capital is beginning to choose to stand on the sidelines. Last week, the assets of money market funds reached a record $6.111 trillion, with investors holding a substantial amount of cash outside the U.S. stock market. "Investors like cash," said Stephen Suttmeier, a U.S. Bank technology research strategist, in a report, indicating that the mountain of money remains a potential source of funds for the U.S. stock market. "As the Federal Reserve maintains a restrictive stance to reduce inflation, investors are flocking back to money market funds with a yield of about 5%."

The performance of the latest earnings season has become particularly important. FactSet pointed out in a report sent to First Financial Daily reporters that the number and percentage of S&P 500 Index companies issuing negative earnings per share (EPS) guidance for the first quarter of 2024 are both higher than the historical average. Overall, 112 S&P 500 Index companies issued first-quarter EPS guidance, with 79 being negative and 33 being positive. This is the second-highest number since FactSet began tracking this metric in 2006, just behind the 82 companies in the first quarter of 2023.

Compared to the 5-year average, seven industries issued more negative guidance, with industries such as industrials, information technology, commodities, and healthcare underperforming. The proportion of companies issuing negative guidance is 71%, also higher than the 59% 5-year average and the 63% 10-year average.

The S&P 500 Index valuation is currently in the top 10% of historical levels. Michael Wilson, a star strategist at Morgan Stanley, believes that the driving force behind the recent round of stock market increases is not stronger expectations for earnings growth but rather the easing of financial conditions and the momentum of investors chasing returns. He argues that companies will need to justify these high valuations, otherwise, there could be a situation of profit-taking.

Wilson expects that only if more companies report strong profit performance can the market expand its gains in a sustainable way, rather than relying solely on a few tech giants. "Looking ahead, we believe that the stock market rally depends on whether other stocks/industries can achieve earnings growth," he said.