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Tech stocks lead S&P 500 lower for second month, trimming YTD gains

The S&P 500 fell for a second straight month in October as investors fretted about an uncertain election outcome, the rising prevalence of COVID-19 cases and valuations of tech companies.

After closing out the month with its worst week since March, the benchmark U.S. large-cap index finished October down 2.7%, led by a 5.1% decline in information technology stocks, with all but two of its 11 sectors losing ground. The S&P 500 fell 3.92% in September, its first down month since March.

The S&P 500 remained 2.8% higher on the year, with six of its 11 sectors still up.

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Much of the path forward for equities, depends on what happens in the Nov. 3 U.S. elections, analysts said.

"It is all about Election Day and Wall Street has steadily been pricing in a 'blue wave,'" said Edward Moya, a senior market analyst with OANDA, in a Nov. 2 interview.

This can be seen, Moya said, in utilities sector stocks, which gained over 5% in October. Communication services, the only other sector that increased in October, ended up less than 0.8% on the month.

"Stock market positioning in October clearly reflects investors buying up utilities as Biden's drive for clean energy will support renewable energy stocks," Moya said.

Utilities remained down about 0.9% on the year.

'Sentiment-sapping' events

The S&P 500's overall decline in October was driven by "various sentiment-sapping macro events," including: a surge in coronavirus cases; new restrictions and lockdowns in Europe; and the inability of the U.S. Congress and the Trump administration to move another fiscal stimulus bill, said Fawad Razaqzada, a market analyst with ThinkMarkets.

The index's decline in October was led by information technology stocks, which saw a 5.1% drop on the month. Energy stocks continued to underperform, falling 4.4% in October and 50.4% on the year, due to persistently low oil prices and an historic fall in global energy demand amidst the pandemic.

"Energy stocks will not become attractive until the northern hemisphere has COVID-19 under control and the crude demand outlook improves," Moya said.

October's decline in the S&P 500 came despite a relatively positive earnings season in which 70% of S&P 500 companies that reported last month beat consensus estimates by a standard deviation or more, the highest rate since at least 1998, David Kostin, Goldman Sachs chief U.S. equity strategist, wrote in a Nov. 1 note.

"Investors are not rewarding earnings beats this quarter," Kostin wrote. "While positive earnings surprises have historically led stocks to outperform the market by 105 [basis points] the day after reporting results, this quarter has seen them lag the market by 10 [bps]."

Volatility, which surged in October, is expected to continue to remain elevated into November, particularly if the results of the U.S. presidential election are not determined for weeks, said John Davi, founder and chief investment officer of Astoria Portfolio Advisors.

Davi said volatility could ramp up if the situation plays out like the presidential election 2000, in which then-Vice President Al Gore did not concede the election until mid-December.

"I can personally see a similar scenario unfold once again," Davi said.

The election will likely be the dominant theme for the equities market in early November, but other issues are likely to take prominence later in the month and into December, Razaqzada said.

"The fresh lockdowns in Europe and surging cases elsewhere poses the greatest risk to stocks and other financial markets," he said. "If the U.S. also heads for another lockdown, things could turn really ugly for the markets."