- Tech stocks have had a difficult few days amid predictions of overvaluation.
- US stocks ended August on a green note due to a surge in expectations for a Fed rate cut.
- The nonfarm payrolls report on Friday could reveal a higher unemployment rate.
Equities ended lower on Monday as AI stocks like Dell and Nvidia fell. Nevertheless, stocks had another bullish month amid elevated expectations for Fed rate cuts. This week, market focus will be on US employment figures, which will continue shaping the outlook for rate cuts in the US.
Nvidia dropped by 3.4% on Monday as investors continued selling after the company’s earnings missed their high expectations. However, the report still showed strong spending in the AI sector. Tech stocks have had a difficult few days amid predictions of overvaluation of companies like Nvidia. Experts have warned of a likely bubble that could burst and hurt the equities market.
“Today is just weakness at the top of the market, in tech,” said Zachary Hill, head of portfolio management at Horizon Investments in Charlotte, North Carolina. “This is not the first time that we’ve had some worries about over-investment in AI, lack of monetization opportunities, and that type of thing.”
S&P 500 performance (Source: Bloomberg)
However, US stocks ended August on a green note due to a surge in expectations for a Fed rate cut. Rate cut bets have risen as the US economy has shown signs of softness, particularly in the labor market. At the same time, Fed officials have adopted a more dovish stance, which has further boosted equities.
Fed’s Christopher Waller said last week that he expects a rate cut this month. Moreover, he is one of the officials Trump is considering to take over from Powell.
Still, there are pockets of strength in the US economy. Data on Friday revealed that consumer spending was strong in July. Moreover, services inflation increased. However, higher inflation is not enough to overshadow the slowing labor market, since it could only be temporary.
“Even if we see an uptick in inflation, which it looks like we are, the Fed may look past that, given that this is going to be tariff-related and temporary,” said Jim Smigiel, chief investment officer at SEI.
Market participants are now looking forward to the ISM manufacturing PMI. The report will show the level of business activity in the manufacturing sector. At the same time, the nonfarm payrolls report on Friday could reveal a higher unemployment rate, further boosting rate cut bets.
