On what has been dubbed “Wipeout Wednesday,” Wall Street experienced a significant downturn, marking a long-anticipated correction that rattled investors. By the close of the trading day, the S&P 500 had plunged 2.3%, its first decline of this magnitude in 356 trading days, thereby ending the longest such streak since 2007, according to Dow Jones Market Data. The tech-heavy Nasdaq Composite fared even worse, plummeting 3.6% for its worst day since October 2022, ending a streak of more than 400 days without a decline of 3% or greater.
Both the S&P 500 and Nasdaq Composite are now on track to log a second straight week of declines, as per FactSet data. These indexes have been under pressure since a June inflation report, released on July 11, sparked a rotation into lagging corners of the market. The selloff intensified throughout the day, with most major stock-market indexes finishing at or near their session lows. The most intense selling pressure was felt by technology stocks and sectors with heavy exposure to megacap stocks, such as consumer discretionary and communication services. The “Magnificent Seven” stocks, a group of megacap companies seen as most likely to benefit from the artificial intelligence revolution, fell 4.6% based on a capitalization-weighted gauge of their performance from Dow Jones Market Data.
Notably, the pain wasn’t limited to stocks. Yields on longer-dated Treasurys climbed while yields on shorter-dated notes fell, causing the yield curve to re-steepen. Bond prices move inversely to yields, and this shift further exacerbated the negative sentiment in the stock market. Investors pointed to weak data on the housing market and alarming comments from former New York Fed chief Bill Dudley, who called for the Federal Reserve to cut interest rates next week to stave off a potential recession, as contributing factors to the market pain.
Kristina Hooper, chief global markets strategist at Invesco, noted that Dudley’s warning about the economy appeared to resonate with investors. “I think there is a little more to this. More cracks are appearing in the economy and investors are becoming a bit more jittery,” Hooper said during an interview with MarketWatch. Dudley’s commentary was not the only catalyst, however. Earnings reports from a trio of key U.S. companies also contributed to the selloff. Visa Inc. offered fresh warnings about the strength of the American consumer, while Alphabet Inc.’s results fueled concerns about its aggressive investment in artificial-intelligence-related infrastructure. Additionally, Tesla Inc. reported a 40% drop in profits, causing its stock to fall more than 12% in its worst day since 2020.
The combined effect of these reports contributed to the extreme weakness in shares of the Magnificent Seven stocks. The companies shed a combined $768 billion in market value, marking their biggest daily drop on record, according to Dow Jones Market Data. Furthermore, two of the three sectors where Magnificent Seven members are most heavily represented — information technology and consumer discretionary — each saw their worst day since September 2022, declining 4.1% and 3.9%, respectively.
The selloff was broad-based, affecting more stocks as the day progressed. Even small-cap stocks, which had recently outperformed, succumbed to the pressure, with the Russell 2000 finishing down 2.1%. Despite this, the Russell 2000 remains up more than 7.2% so far this month, according to FactSet data. A few bright spots remained, however. The S&P 500 utilities sector rose more than 1%, while healthcare, energy, and consumer-staples stocks also finished higher. Large-cap value stocks were largely spared from the carnage, with the SPDR Portfolio S&P 500 Value ETF down just 0.3%, at $49.99.
However, other beneficiaries of the July rotation trade didn’t fare as well, with the Dow Jones Industrial Average off by 504 points, or 1.3%, sliding back below 40,000. The question now plaguing investors is how much longer the selloff can continue. Gene Goldman, chief investment officer at Cetera, said the pullback had been widely anticipated and could even be construed as healthy for markets given large-cap stocks’ lofty valuations. “I was telling our advisors that the market was due for a pullback — look at the combination of high valuations of the stock market, high expectations and high concentration,” Goldman told MarketWatch over the phone on Wednesday.
Goldman suggested that a repeat of a similar pullback that happened last year could be in store. In that instance, the S&P 500 briefly fell into correction territory in October after peaking in late July. Between now and the fall, plenty of risks remain. Many of the largest U.S. companies are due to report earnings this week and next. Perhaps the biggest focus for investors will be the upcoming meeting of the Federal Reserve next week. Many are hoping to hear Fed Chair Jerome Powell offer some indication that the central bank will start cutting rates in September.
Kristina Hooper added that the market is ripe for a pullback, given the strong rally and the lack of significant drops in a long time. She highlighted that a catalyst, such as the start of Fed rate cuts, could be supportive of stocks. “We have this catalyst on the horizon, and it’s the start of Fed rate cuts,” Hooper said. “I think it’ll be very supportive of stocks, and I would anticipate that we get messaging in advance of the September cut.” However, Powell has demurred during recent opportunities to more strongly signal that a rate cut is imminent, even as other senior Fed officials have started to call for one more forcefully.
If investors are not satisfied with the Fed chair’s messaging next week, more losses could be in store, according to Mohannad Aama, a portfolio manager at Beam Capital Management. “If the Fed statement isn’t really indicative of a cut in September, I think we’ll see a continuation of the selloff,” he told MarketWatch on Wednesday. The S&P 500 has now erased all of its gains from earlier in July, though it remains up 13.8% year-to-date. The Nasdaq is now off 2.2% this month but is still up 15.5% for the year.
For now, signs indicate that traders are bracing for more pain in the near term. The Cboe Volatility Index, better known as the VIX or Wall Street’s “fear gauge,” rose 22.6% on Wednesday to 18.04 — its biggest gain since June 2022, according to Dow Jones data.