Equities fell more than 1% as the major indexes sold off in the latter half of the week. Tech stocks took the brunt of the damage. Several factors combined to disappoint investors, including weak U.S. economic data, a continuation of lousy first-quarter earnings from tech companies, and a Bank of Japan decision not to introduce new stimulus.

Tech stocks, which lost 3.6% last week, were particularly battered by fallout from Apple ’s first quarterly sales drop in 13 years. Apple shares declined 11% to $93.74. First-quarter U.S. gross domestic product, out Thursday, wasn’t encouraging, either, with GDP expansion a sluggish 0.5% in the period, weaker than forecast – see additional information in the “Heads Up” section.

Investors were treated to the relatively unusual phenomenon of Europe growing faster than the U.S. Euro-zone first-quarter GDP rose 0.6%, a blistering rate by Continental standards, and higher than expected. That relative disparity drove the U.S. dollar down some more.

For the past 18 months, investors have bemoaned the extraordinarily strong greenback, which depresses overseas sales at U.S. multinationals. Last week, however, greenback weakness became an issue. To the extent that it indicates that U.S. expansion is slow compared to the rest of the world, investors don’t like it.

Last week, the Dow Jones Industrial Average lost 230 points to 17,773.64 or 1.3%. The S&P 500 index fell 26 to 2065.30. Tech stock weakness again hit the Nasdaq, which fell 2.7% to 4775.36.

A whiff of global growth fears returned on the dollar woes, says John Canally, an investment strategist. The concern that central banks are “out of bullets” also hasn’t gone away, he says. Unlike in the January-February market downdraft, however, commodity prices, oil especially, are being supported by the lower dollar.

Outside the tech sector, reactions to earnings were relatively muted, adds Edward Perkin, chief investment officer at Eaton Vance Management. In tech, the stocks that are being punished the most are the “heavily owned issues,” like Apple and Alphabet (GOOGL), where “good earnings numbers weren’t good enough,” if they fail to meet expectations.

Though the energy sector should be less of a drag on earnings in the future, says Joseph Amato, chief investment officer of Neuberger Berman, “…I wouldn’t chase the market at these levels until there’s greater clarity on earnings.”

Since last summer, the market has attempted two major rallies that have failed to surpass all-time highs set in May 2015. This latest one has seen some strong breadth. Even so, “the momentum just isn’t there,” says Perkin, and we agree.

The second-longest bull market in history is stalled, waiting for a catalyst, and that will be earnings growth. If the market is convinced profits will expand, it’s party on. Without it, chances are the S&P 500 index will continue to shilly-shally roughly between 2000 and 2100.

(Source: Barrons Online)

The U.S. stock market finished higher last week, coming within a whisker of all-time highs but failing to push through. Trading was active and U.S. economic data was mixed.

Worse-than-expected earnings from tech stocks like Microsoft (ticker: MSFT) and Alphabet (GOOGL), parent of Google, pushed down the tech sector, which fell 2% Friday.

The Dow Jones Industrial Average gained 106 points or 0.6%, to 18,003.75. The Standard & Poor’s 500 index advanced 11  to 2091.58. The S&P 500 hit 2111 intraday Wednesday, less than 1% below the 2131 record of last May. Tech-stock weakness hit the Nasdaq, which fell 0.7% to 4906.23. The Russell 2000 jumped 1.4% to 1146.69.

Last week’s volatility and failure to punch through the old high reflects an “internal debate on the Street on whether the market is overvalued or fairly valued,” says Malcolm Polley, president of Stewart Capital Advisors. Undervalued it’s not, he adds.

With a market price/earnings ratio of 17 times, “you can make the case that if profit margins hold up, profits grow, and rates don’t go up, the market is adequately valued,” he adds. Only higher earnings and stable rates will get it higher, he adds, but rates are going up, and the market’s seasonally weak summer season is coming up.

We agree with Polley’s view, but it must be noted that market breadth—the number of stocks advancing versus those declining—and other underlying factors are as bullish as they’ve been since a year ago.

Also, as James Paulsen, chief investment strategist for Wells Fargo Capital Management, points out, defensive stocks have been giving way. The focus has been on new highs, but the leadership change is important as an indicator that the market could soon make another try for a new high.

Last week utilities, staples, and telecom stocks fell. Those were the best performers in the first quarter but are so far the worst in the second. Other bullish signs include the trend of small caps, cyclicals, and multinationals beating, respectively, large caps, defensive, and domestic stocks.

Part of the market-valuation debate is influenced by the earnings reports. On that front, “there isn’t much clarity,” yet, says J.J. Kinahan, chief strategist for TD Ameritrade. For the multinationals it was a mixed picture, he adds, with McDonald’s (MCD), Caterpillar (CAT), and IBM (IBM) showing weakness overseas. It suggests consumers outside the U.S. are doing less well than reports indicate, he adds.

On Wednesday the Federal Reserve Open Market Committee meeting ends, but no rate changes are expected. The U.S. first quarter GDP number will be released Thursday. That also marks the day when the bull market that began in March 2009 will become the second-longest in history, at 2607 days, topped only by the technology bull of October 1990 to March 2000.

(Source: Barrons Online)