Market in turmoil, NASDAQ sinks +3% as Nonfarm Payrolls highlight labor market slowdown

US economy adds 114K jobs in July, well below Wall Street expectations.
US indices reel on news as Unemployment rises to 4.3%.
Market now expects three interest rate cuts by Fed this year, 50 bps cut in September.
Elliot Management calls AI narrative "overhyped".

The stock market pullback that began in the latter half of July is pumping the brakes full force on Friday after US Nonfarm Payrolls for last month surprised to the downside. With Wall Street expecting an already low figure of 175K, US payrolls added just 114K positions in July, and June’s figures of 206K new jobs was revised down to 179K. The Unemployment Rate rose from 4.1% to 4.3%.

The market has taken this as a sign that the US economy is throttled for a harder landing than initially expected. On the good side, investors are finally expecting three interest rate cuts at the remaining Federal Reserve (Fed) meetings in September, November and December. What’s more, the market now expects a 50-basis-point cut at the September meeting, whereas just yesterday the consensus was 25 bps.

The NASDAQ is in for one of its worst showings in years as the tech-heavy index pulls back as much as 3.4% in the morning session. The S&P 500 is down 2.5%, and the Dow Jones contracts 1.8% at the time of writing.

S&P 500, NASDAQ news

All the bright spots in the summer narrative are now being discarded. Hedge fund Elliot Management released an editorial in The Financial Times arguing that the artificial intelligence (AI) theme is “overhyped”.

The mega cap tech stocks like Microsoft (MSFT), Meta Platforms (META) and Amazon (AMZN) are also on the verge of reducing their supercycle of buying Nvidia’s (NVDA) AI-focused chips, according to Elliot, which should put downward pressure on the overall market.

Elliot also complained that AI was not cost-efficient enough to merit the current valuation of many of these AI stocks, which should lead to a pullback in valuations.

A poor third-quarter outlook led Intel (INTC) to slash its workforce by 15% and forgo its dividend, which it had paid consecutively for 31 years. Super Micro Computer (SMCI) and Amazon both dropped around 10%, and Nvidia was down about 5% at the time of writing.

As if the timing couldn’t be worse, the US Justice Department launched a probe into Nvidia’s business practices. Advanced Micro Devices (AMD) is said to have complained about Nvidia abusing its domination of the AI chip industry, and other AI startups have made formal complaints as well.

One specific complaint is that Nvidia has threatened customers who also buy products from its rivals. The threats come from the belief that Nvidia will reduce their allotment of their top-of-the-line chips to customers who buy from other shops. Another issue surrounds Nvidia supposedly bundling its products in anti-competitive ways. Nvidia is currently thought to control about 80% or more of the AI chip market.

Nvidia denied the allegations. "We compete based on decades of investment and innovation, scrupulously adhering to all laws, making NVIDIA openly available in every cloud and on-prem for every enterprise, and ensuring that customers can choose whatever solution is best for them," the company founded and run by CEO Jensen Huang said in a statement.

Semiconductor stocks FAQs

What is a semiconductor?

A semiconductor is a term for various types of computer chips. Officially called semiconductor devices, these computer chips rely on semiconductor materials like silicon and gallium arsenide to process the electrical current that produces the modern world of computing. They come in many shapes, sizes, enhancements and configurations such as diodes, transistors and integrated circuits to more complicated applications like DRAM memory, simple processors and even GPUs.

What types of semiconductor companies are there?

First, there are the pure chip designers, such as Nvidia, AMD, Broadcom and Qualcomm. These companies use sophisticated software to design and test chips. Second, there are the equipment manufacturers that provide the machines necessary to build computer chips. These include ASML and Lam Research. Then, there are foundries that manufacture the chips. These include Taiwan Semiconductor and GlobalFoundries. Last of all are the integrated device manufacturers who design their own chips and additionally manufacture themselves. These include Samsung and Intel.

What is Moore’s Law?

It is the observation that the number of transistors in an integrated circuit doubles every two years. The “law” is named after Gordon Moore, who founded Fairchild Semiconductor and later Intel. The doubling is possible due to the shrinking size of process nodes or parts in the computer chip. In 1971 the advanced commercial manufacturing had reached 10 microns in width. In 1987 semiconductor technology had advanced to 800 nanometers in width. By 1999, this process had moved to 180 nanometers. By 2007, the size had dropped to 32 nanometers, and this fell all the way to 3 nanometers in 2022, which is close to the size of human DNA.

How large is the semiconductor industry?

In 2022, the global semiconductor industry had revenues just under $600 billion. In total, the industry shipped 1.15 trillion semiconductor units in 2021. The leading nations involved in the semiconductor supply chain are Taiwan, the United States, China, the Netherlands, South Korea, Japan and Israel.

NASDAQ, S&P 500 charts

The NASDAQ Composite has broken through its 100-day Simple Moving Average (SMA). It now looks like it may reach for support at the 200-day, which it hasn't grazed . Some support exists at the May 31 low of 16,445. Then there is the 200-day SMA at 15,811 and the April 19 range low of 15,222.

NASDAQ daily chart

The S&P 500 is reacting somewhat better and has discovered support at the 100-day SMA. Still, the odds are on for it to drop back to 5,000, where it found support in April. Granting that level more significance is the fact that the 200-day SMA is sitting just above 5,000.

S&P 500 chart

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