S&P 500 and Nasdaq face "Black Wednesday"! Even more frightening is that this round of US stock market correction may be "far from over"

According to the financial news app Zhitong Finance, senior economists from the top US brokerage Interactive Brokers stated on Wednesday that the correction in the US stock market is far from over, emphasizing that US stocks will face more intense downward pressure this quarter. The sell-off of technology stocks in the US stock market led to the S&P 500 Index and the NASDAQ Composite Index experiencing their worst trading day in over a year on Wednesday, dubbed "Black Wednesday." Leading the plunge recently were the seven major tech giants including NVIDIA and Microsoft, and these seven giants hold a high weight in the S&P 500 Index and the NASDAQ, which is a major factor in the recent continuous decline of these two indices.

On Wednesday, the benchmark stock index in the US, the S&P 500 Index, suffered its most severe single-day decline since December 2022, with a 2.3% drop. It is worth noting that in the previous 356 trading days, the index had never fallen by more than 2%, showcasing remarkable resilience. The tech-heavy NASDAQ and NASDAQ 100 indices both plummeted by over 3.6% at the close of the US stock market, marking the largest decline since October 2022.

Risk aversion sentiment in the US stock market significantly increased, with traditional safe-haven stocks performing well. The utility sector was one of the only three core sectors of the S&P 500 Index that rose, mainly composed of high dividend stocks, especially benefiting from the expected rate cuts by the Federal Reserve. The energy sector also rose, while the technology, consumer discretionary, and communication services sectors of the S&P 500 Index all fell by over 4%. In addition, the fear index VIX surged by 22.55% to 18.04, hitting a three-month high, reflecting investors buying put options to hedge against selling panic.

Investors were disappointed by the latest quarterly performance data of Tesla (TSLA.US) and Google's parent company Alphabet (GOOGL.US), which then spread panic to other tech giants and the broader tech sector. Investors are concerned that other highly valued tech giants may also fail to meet the market's lofty expectations, and the market's tolerance for any flaws in the performance of tech giants is almost zero. This led to a sell-off wave in the entire tech sector under panic, ultimately causing the tech giants to fall by 3.6% in the high-weighted NASDAQ Composite Index and 2.3% in the S&P 500 Index.

The worst period of the year for US stocks may be approaching: a potential correction of up to 10% to 15% this quarter

"Despite the recent sell-off, the price-to-earnings ratio of the S&P 500 Index is still close to 22 times, and overall, investors are not satisfied with the Q2 US stock earnings season that started in mid-July," said José Torres, senior economist at Interactive Brokers, leading a team of economists in a report.

"This quarter, the historically high valuations of tech giants and overvaluations have led the market to have excessively high performance expectations, irrational prosperity, and from the perspective of profit expectations from tech giants, the 2024 US presidential election may fundamentally change the situation in the tech industry," economists led by José Torres stated "Despite facing multiple unfavorable factors so far this year, the S&P 500 index has risen by about 14% year-to-date. The irrational prosperity in the U.S. stock market still exists this year." "We expect a potential pullback of up to 10% to 15% this quarter. From a historical data perspective, this may be the worst period of the year."

Looking at recent historical highs, the S&P 500 index has retraced close to 5%, the NASDAQ Composite Index has retraced about 7% from its historical high, and the NASDAQ 100 Index has retraced about 8%.

For the broader financial markets, a "key factor" is the significant narrowing of the spread between 2-year U.S. Treasury yields and 10-year U.S. Treasury yields, which briefly reached around 14 basis points on Wednesday, hitting a nine-month low. This reflects market funds flowing into the short-term U.S. bond market for safe-haven trades due to risk aversion.

Economists like Torres stated, "In the past, when these two instruments reached basic parity after yield inversion, the stock market experienced significant adjustments. Therefore, this time is no exception."

Wall Street veterans who have experienced the dot-com bubble and the 1987 crash frequently warn that the tech stock bubble is about to burst

Albert Edwards, a well-known strategist from Societe Generale, is considered a long-term bear in the U.S. stock market. In a recent research report, he warned that investors "need to be highly vigilant as the tech stock bubble may burst comprehensively." The technology sector currently accounts for approximately 35% of the total market value of the S&P 500 index, with the top seven tech giants accounting for as much as 30%.

Having experienced the bursting of the dot-com bubble in 2000 and the 1987 U.S. stock market crash, as a Wall Street veteran, Edwards has been warning about the investment risks related to the prospect of U.S. economic recession and the bursting of the stock market bubble for several months. He has repeatedly predicted that investors may soon face losses similar to those seen in the dot-com bubble burst at the beginning of this century.

"What could burst the tech stock bubble? A very simple trend of declining optimism in earnings per share could be effective." He shared a chart showing a cooling trend in the overall earnings per share of the NASDAQ 100 index components, while the overall earnings per share of the S&P 500 index and Russell 2000 index components are still experiencing slight increases, implying that Wall Street analysts are beginning to take a more cautious stance on how much profit growth large tech companies can achieve.

Another individual with a similar view to Edwards is Mike Wilson, Chief Equity Strategist at Morgan Stanley. This stock strategist, who recently switched from a bearish to a bullish stance on U.S. stocks, warned investors to pay attention to the risk of a pullback. He stated that later this year, the overall earnings per share expectations of S&P 500 index component companies are expected to significantly weaken, predicting that U.S. stocks may soon experience a pullback of up to 10%.

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