Big Drop in US Stock Markets: The Impact of High Valuations

Reasons for the Sharp Decline in US Markets

The US stock markets continue to decline amid concerns over high valuations. The S&P 500 Index, noted for its concentration of technology firms, is becoming more vulnerable to market corrections. The pullback that occurred on Thursday exemplifies a broader trend that has been ongoing since the beginning of this month.

High Valuations and the 'Magnificent Seven'

The stocks known as the “Magnificent Seven,” which encompass the largest technology companies in the country, are trading at significant levels above the S&P 500 Index, creating notable pressure. According to an analysis by Yardeni Research, the price/earnings ratios for these companies are at excessively high levels compared to the S&P 500 for the next 12 months. Chris Galipeau warns, “The markets are not cheap. Our margin for error is very narrow. It is critical that earnings expectations remain strong next year.” He also adds that if these expectations weaken, problems could arise in the markets.

Layoffs and Market Reaction

The Challenger report published on Thursday revealed an increase in layoffs in the US in October. This situation led to a sharp decline in American stock markets. The Dow Jones Index fell by 0.8%, the S&P 500 by 1.1%, and the technology-heavy Nasdaq Composite Index by 1.9%. Yardeni Research points out that the majority of the layoffs occurred in the warehouse and technology sectors.

Decline in 'Magnificent Seven' Stocks

The Roundhill Magnificent Seven ETF ended Thursday with a loss of 2.1%. Stocks such as Nvidia, Tesla, Amazon, Meta, and Microsoft recorded significant declines. However, Alphabet, Google's parent company, was the only stock to close positively. The S&P 500's reliance on technology stocks is causing unease among investors. Since the beginning of November, the S&P 500 has lost 1.8%, while the Roundhill ETF has decreased by 2.6%.

AI Investments and Market Performance

Technology giants continue their investments in artificial intelligence during the earnings season at the end of October. Galipeau states, “Big technology companies have significantly increased their capital expenditures in the US.” However, a possible slowdown could create concerns in the markets. Nevertheless, the profit quality of large technology companies has historically remained at high levels.

Market Status and Outlook

Despite the pullbacks experienced last November, the S&P 500 has risen by 14.3% since the beginning of the year. Galipeau expresses that strong earnings results have supported market resilience. Investors are eagerly awaiting the Nvidia third-quarter earnings report expected to be released at the end of this month. Louis Navellier commented, “Nvidia’s strong earnings could reinforce the artificial intelligence narrative.”