European Stocks Drop on Weak Earnings; Pound Falls: Markets Wrap

(Bloomberg) — Stock traders kept driving a rotation out of the megacaps that have powered the bull market into other corners of Wall Street.

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Most big techs retreated, though Nvidia Corp. rebounded after an almost 5% plunge. Economically sensitive shares outperformed, with the Russell 2000 index of smaller firms heading toward its highest level since November 2021. An equal-weighted version of the S&P 500 — where the likes of Apple Inc. carry the same heft as Dollar Tree Inc. — beat the US equity benchmark. That gauge is less impacted by the largest companies — providing a glimpse of hope the rally will broaden out.

“Investors may be looking to rotate away from large technology companies, which are widely owned and may have fewer clear catalysts going forward,” said David Russell at TradeStation. “With the election coming and the economy returning to balance, the long-awaited rotation away from megacaps to everything else could finally be at hand.”

Traders also continued to wade through a raft of corporate earnings. Morgan Stanley climbed 7% as traders and bankers joined the rest of their Wall Street rivals in posting better-than-expected revenue, fueling a 32% profit jump for the third quarter. United Airlines Holdings Inc. jumped 12% as earnings beat estimates.

The S&P 500 rose 0.3% to around 5,830. The Nasdaq 100 was little changed. The Dow Jones Industrial Average added 0.6%. The Russell 2000 climbed 1.6%. The Bloomberg “Magnificent Seven” gauge slid 0.3%.

Treasury 10-year yields declined two basis points to 4.01%. West Texas Intermediate crude fell 0.3% to $70.36 a barrel.

“We recently upgraded small caps to neutral vs large caps after a persistent 3 1/2 year period of underperformance,” according to Nicholas Lentini at Morgan Stanley and his colleagues. “This decision came on the back of the strong September jobs report and the Fed’s decision to deliver a 50 basis-point rate cut at last month’s meeting.”

For them to get outright bullish on small caps, the analysts said leading macro indicators would likely need to reflect a clear acceleration in growth.

Adam Turnquist at LPL Financial noted small caps have been stuck in a consolidation range over the last few months as investors questioned the likelihood of a soft-landing scenario and path of monetary policy.

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The thing is small caps tend to be more sensitive to economic conditions and interest rates relative to their larger cap peers.

“With the growth outlook recently improving — underpinned by better-than-feared labor market conditions — and increased visibility into Fed rate cuts, the Russell 2000 has rallied off the lower end of its rising price channel,” he noted. “Recent strength in the banking space has further supported small caps.”

Momentum indicators have also recently turned bullish, adding to the evidence of a topside breakout, Turnquist said. Despite the improving absolute performance, the Russell 2000 vs. S&P 500 ratio chart still remains in a downtrend and below its declining 200-day moving average.

“A close above the July highs would validate a trend reversal in favor of small caps outperforming,” he concluded.

The S&P 500 has already set 46 closing records this year, and according to the trading desk at Goldman Sachs Group Inc., that rally is primed to extend into the final months of 2024.

Scott Rubner, a managing director for global markets and tactical specialist at the bank, estimates the US stocks benchmark can finish the year “well north of 6,000.” According to his calculations of data going back to 1928, the historical median of S&P 500 returns from Oct. 15 to Dec. 31 is 5.17%. In election years median returns are even higher, just over 7%, implying a year-end level of 6,270.

“The equity market selloff is canceled, and a year-end rally is starting to resonate with clients shifting from hedging from the left-tail to the right-tail as institutional investors are getting forced into the market right now,” Rubner wrote in a note to clients Tuesday. Professional investors are growing concerned about materially underperforming their benchmarks, he added.

Corporate Highlights:

• Boeing Co. is considering raising about $15 billion in a sale of shares and a mandatory convertible bond, Reuters reported, citing people familiar with the matter.

• J.B. Hunt Transport Services Inc.’s third-quarter profit topped the average analyst estimate. Revenue fell less than analysts expected.

• Qualcomm Inc. is likely to wait until after the US presidential election in November before deciding whether to pursue an offer to buy Intel Corp., people familiar with the matter said.

• U.S. Bancorp raked in net interest income that topped analyst estimates as fixed-rate assets in its portfolio benefited from higher borrowing costs.

• Novavax Inc. tumbled after US regulators placed a hold on the company’s experimental influenza and Covid-19 combination vaccines because a study volunteer developed a serious nerve disorder.

• Abbott Laboratories narrowed its full-year profit outlook, raising the midpoint slightly, as strong demand for its diabetes devices continued driving growth.

• Airbus SE plans to eliminate as many as 2,500 positions at its defense and space division as the European aircraft manufacturer seeks to streamline a business that’s consistently racked up charges and suffered from stiff competition.

• Warburg Pincus is weighing a possible buyout of German IT services company Nagarro SE, people familiar with the matter said, potentially adding to the strong momentum of dealmaking in the country.

Key events this week:

• ECB rate decision, Thursday

• US retail sales, jobless claims, industrial production, Thursday

• Fed’s Austan Goolsbee speaks, Thursday

• China GDP, Friday

• US housing starts, Friday

• Fed’s Christopher Waller, Neel Kashkari speak, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 rose 0.3% as of 1 p.m. New York time

• The Nasdaq 100 was little changed

• The Dow Jones Industrial Average rose 0.6%

• The MSCI World Index was little changed

• S&P 500 Equal Weighted Index rose 0.6%

• The Russell 2000 Index rose 1.6%

• Bloomberg Magnificent 7 Total Return Index fell 0.3%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%

• The euro fell 0.2% to $1.0868

• The British pound fell 0.5% to $1.3004

• The Japanese yen fell 0.4% to 149.74 per dollar

Cryptocurrencies

• Bitcoin rose 1.9% to $67,761.51

• Ether rose 1.7% to $2,616.6

Bonds

• The yield on 10-year Treasuries declined two basis points to 4.01%

• Germany’s 10-year yield declined four basis points to 2.18%

• Britain’s 10-year yield declined 10 basis points to 4.06%

Commodities

• West Texas Intermediate crude fell 0.3% to $70.36 a barrel

• Spot gold rose 0.4% to $2,673.39 an ounce

This story was produced with the assistance of Bloomberg Automation.

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