The S&P 500 Index has fallen 2.6% over the past two days, testing the 5,523 level on July 18. The correction erased the previous two weeks of gains, but buying activity picked up in the last trading session after chipmaker Taiwan Semiconductor Manufacturing Company (TSM) reported better-than-expected earnings.
Investor fraud has had a negative impact, which partially explains why Bitcoin (BTC) and Ether (ETH) fell on July 18. Understanding the reasons for the decline in the U.S. stock market is essential to determining whether cryptocurrencies should maintain a positive correlation.
Rising unemployment claims and economic concerns
Fears of rising inflation due to unsustainable government debt may have a negative impact in the short term, but it opens up opportunities as investors look for alternative scarce assets. However, if investors feel the economy is worsening, especially in the jobs market, traders are likely to seek protection in cash and short-term government bonds.
On July 18, the U.S. Department of Labor reported that initial unemployment insurance claims rose to a seasonally adjusted rate of 1.867 million in the week ended July 6, the highest level since November 2021.
This indicator focuses on the number of people receiving benefits after the first week of support, so it is used as a proxy for employment. This data is particularly negative for the real estate market, which puts the financial sector at risk.
According to CRE Daily, Federal Reserve Chairman Jerome Powell told the Senate Banking Committee on July 9 that the commercial real estate sector poses a major risk, especially for smaller banks with concentrated exposure. Powell stressed the importance of banks honestly assessing and managing risks, as the commercial sector’s challenges are expected to persist for years due to hybrid operations.
Also, the June FOMC minutes show that credit quality deteriorated further in April and May, with delinquencies rising particularly in the office, hotel, and retail sectors. This scenario partially explains why the banking sector was weak on July 18, with JP Morgan (JPM) down 3.2%, Wells Fargo (WFC) down 2.8%, and Bank of America (BAC) down 2%.
The impact of technology export restrictions on the market
Meanwhile, U.S.-listed technology stocks were hit hard after Bloomberg reported that the U.S. was considering rules to control exports of U.S. technology that is key to artificial intelligence. While the focus is on curbing China’s dominance in chip manufacturing, the move would curb billions of dollars in sales for these companies. Shares of Advanced Micro Devices (AMD) fell 3.1% and ASML Holding (ASML) fell 2%.
According to Bloomberg, Jim Covell, head of equity research at Goldman Sachs, warned that the AI investment frenzy could lead to an economic bubble. Covell said that AI investments have yielded modest returns, with Microsoft, Google, and Amazon only accounting for 7% of their cloud service revenue growth. However, Covell doesn’t see that happening any time soon, as continued investments continue to drive stocks like Nvidia.
Related: Meta to not launch new AI products in EU due to ‘regulatory uncertainty’
David Bahnsen, founder and chief investment officer of Bahnsen Group, echoes this sentiment, shunning big tech stocks, fearing a repeat of the dot-com bubble burst and predicting significant investor losses if investors don’t pull out in time. Bloomberg cited a survey conducted by Lucidworks that found that less than half of companies investing in AI have yet to see significant returns.
This analysis justifies the 2.5% drop in Amazon (AMZN) stock and the 2.2% drop in Google (GOOGL) and Apple (AAPL), which has led to bearish sentiment spreading to other markets, including cryptocurrencies.
This article does not contain any investment advice or recommendations. All investment and trading moves involve risk, and readers should conduct their own research when making decisions.