ASX Expected to Drop Following US Technology Sell-off

Australia's share market is anticipated to open lower as a significant sell-off involving the world’s largest technology companies weighed heavily on US stocks during the final days of a notably strong year.

Futures trading indicates a decrease of 0.35 percent, or 29 points, in the ASX on Monday morning, bringing it down to 8228. Traders are currently assessing last week’s downturn in the US markets.

Impact of the US Market Decline

In the US, the Nasdaq index, representing several top technology firms known as the "Magnificent Seven," suffered the largest losses. In a session marked by low trading volumes, which typically exacerbate market movements, the S&P 500 dropped by 1.1 percent while the Nasdaq 100 fell by 1.4 percent. Major sectors were affected by the decline, but the technology giants experienced the most significant impact after an impressive rise, where this select group accounted for over half of the gains in the US equity markets throughout 2024.

Traders Advise Caution

"I think Santa has already arrived! Have you seen the performance this year?" remarked Kenny Polcari, a financial advisor at SlateStone Wealth. He advised against making substantial investment decisions as this week is holiday-shortened and trading volumes are expected to be low. Therefore, any market movements may be amplified.

Steve Sosnick from Interactive Brokers noted an unexpected surge in inquiries, attributing this to large accounts and pension funds needing to rebalance investments ahead of the year's end.

Broader Market Trends

The S&P 500 and Nasdaq 100 saw their previous week’s gains diminished. The Dow Jones Industrial Average also fell by 0.8 percent on Friday. Notably, the index tracking the "Magnificent Seven" plummeted by 2 percent, significantly driven down by Tesla and Nvidia's losses. Moreover, the Russell 2000 index, which comprises smaller companies, decreased by 1.6 percent.

Meanwhile, the yield on 10-year Treasuries rose by 4 basis points, reaching 4.62 percent, and the Bloomberg Dollar Spot Index showed fluctuations.

Flow of Funds and Market Expectations

Data from EPFR indicated that funds tied to key market trends over the past three years saw setbacks in the week leading to Christmas. Notably, redemptions from cryptocurrency funds reached a record high, while technology sector funds extended their longest streak of outflows since early 2023.

This year’s stock market rally in the US has led to very high expectations for further growth, which could pose a challenge for advancing into the new year. Specific higher expectations exist for technology stocks due to their significant surge within the year.

According to an analysis by Bloomberg Intelligence, analysts project nearly 30 percent growth in earnings for the tech sector next year. However, tech firms' share of the S&P 500 could imply that broader expectations of 40 percent growth are already priced in.

Market Concerns About Valuations

"The largest companies in the market, along with other much-admired tech stocks, continue to be valued at substantial premiums," explained Jason Pride and Michael Reynolds at Glenmede. They cautioned that excessive valuations could lead to potential declines if earnings do not meet these high expectations. They also emphasized the importance of regularly diversifying investment portfolios given the concentration in the market.

ASX, Technology, Sell-off