Blue screen of death

Good Afternoon. US stocks finished lower on Friday, extending their losses to record worst week since April. The market seems to continue rotating from the tech sector into value and small-cap stocks.

For the week, the S&P 500 closed 2% down, and the Nasdaq was down 3.6%. The Dow closed 0.7% up, and the Russell 2000 was up 1.7%.

CNN's Fear & Greed Index now stands at 49 (Neutral) out of 100.

Source - CNN

The top five trending stocks on Reddit are CrowdStrike, Nvidia, Gartner, SPY, and AMD.

There has been much talk about increased market valuations in recent years; however, fundamental factors such as a rise in return on capital and free cash flow generation of the S&P 500 companies are driving this higher valuation. Check the curated insight section for more details.

A faulty technology update from CrowdStrike for its Falcon platform caused havoc worldwide on Friday. People around the world began encountering an error screen known as the “blue screen of death.” This was not a cyber attack, and the issue is now fixed as per CrowdStrike. The fix is not easy and requires manual intervention. It will be important to see how CrowdStrike handles communication in the future around the root cause and what it did to prevent this from happening in the future. It will be important for the company to be transparent about what happened to gain back the lost credibility.

Microsoft estimates that 8.5 million Windows devices are affected by the CrowdStrike update, which is less than 1% of all Windows machines.

Elon Musk says he deleted CreowdStrike from all the systems.

According to the CME FedWatch tool, there is now a 94% likelihood that the Fed’s target range for the federal funds rate will be lowered by a quarter percentage point to 5% to 5.25% in September from the current 5.25% to 5.50%. Fed Governor Christopher Waller said in his remarks at the Kansas City Fed program that rate cuts are ahead soon as long as there are no surprises on inflation and employment. NY Fed President John William also made similar comments in his interview with the WSJ.

Berkshire sold around $1.48 billion Bank of America shares, filing shows.

Goldman Sachs said Monday that it topped profit and revenue estimates on better-than-expected fixed-income results and smaller-than-expected loan loss provisions.

UnitedHealth Group reported strong Q2 2024 earnings.

Netflix beats estimates as ad-supported memberships rise 34%. The streamer’s global paid memberships rose 16.5% year over year to 278 million. This marks one of the last updates Netflix will release regarding its membership numbers.

American Express reported better-than-expected second-quarter profit, underscoring the benefit it has enjoyed by focusing on a premium customer base.

Taiwan Semiconductor beat revenue and profit expectations in the second quarter as demand for advanced chips used in AI applications continues to surge.

ASML reported second-quarter earnings and sales that beat forecasts, as interest in artificial intelligence chips drives demand for the Dutch firm’s critical semiconductor-making equipment.

Morgan Stanley tops estimates on stronger-than-expected trading and investment banking.

Bank of America beats second-quarter revenue and profit topped expectations on rising investment banking and asset management fees.

Brian Garrett at Goldman Sachs explains why US stocks are more volatile than they appear at the index level. The options-selling funds have grown in size, and their actions have led to a tighter range of the S&P 500 index, but there have been large moves in individual stocks. The good news is the systematic selling of options drives down the heading costs.

The Alger Capital Markets Summer 2024 report provides insights into the current state and future outlook of the capital markets. The full report is packed with powerful insights, but below is the summary of key points -

• Many central banks have started cutting rates, which historically has been good for stocks.

• Economic expansions are growing in duration, which means more growth may be ahead of us.

• Return on capital and free cash flow generation have significantly improved over time. All else equal, this should warrant higher equity valuation multiples.

  

• Markets go better 3 to 12 months after elections.

• Industries or technologies early in their lifecycle are less susceptible to economic volatility because of their potential for market share gains.

  

This Bloomberg article discusses that the rise in company market value does not necessarily make workers rich. This makes perfect sense to me and highlights the fact that having equity exposure is essential for wealth creation. American companies are dominating the world, but the evidence suggests today’s corporate aristocrats are busy squeezing workers.

• The article by Crescat Capital compares the current valuation of leading technology companies, drawing parallels to the dot-com bubble of 2000. Currently, the largest market cap stock in the US is ~11% of GDP; in comparison, at the peak of the dot-com bubble, the most valued stock was 5.5% of the GDP.