Market Sell-Off After Powell’s Comments: Which Small Cap Stocks Remain Healthy?

NEW YORK (AP) — Dow Jones futures saw a rise early Thursday, along with S&P 500 futures and Nasdaq futures, after the market sold off Wednesday as Federal Reserve chief Jerome Powell said a Fed rate cut in March was unlikely.

The stock market rally started Wednesday with techs solidly lower following earnings from Microsoft (MSFT), Google parent Alphabet (GOOGL), and Advanced Micro Devices (AMD). But sharp losses broadened following Fed chief Powell’s comments.

While the major indexes still look healthy, investors should be cautious about new buys in the very short term and consider taking some profits.

Earnings were reported by Qualcomm (QCOM), Nextracker (NXT), former NXT parent Flex (FLEX), and Align Technology (ALGN) on Wednesday night. QCOM stock fell slightly in premarket trade after strong earnings and in-line guidance. Nextracker stock skyrocketed, signaling a buying opportunity. ALGN stock surged above its 200-day line. FLEX stock climbed modestly.

Royal Caribbean (RCL) missed Q4 revenue views before the open, but beat EPS targets and guided higher on Q1 and 2024 earnings. Shares rose modestly early Thursday. RCL stock has an emerging base and is finding key support. (AMZN), Apple (AAPL), and Meta Platforms (META) loom Thursday night. All three Magnificent Seven stocks fell modestly Wednesday.

Dow Jones futures rose 0.1% above fair value. S&P 500 futures climbed 0.4% and Nasdaq 100 futures rose 0.55%. The 10-year Treasury yield edged down to 3.93%. Crude oil futures advanced slightly as OPEC+ signaled it would maintain stock with current production plans. Remember that overnight action in Dow futures and elsewhere doesn’t necessarily translate into actual trading in the next regular stock market session.

As expected, the Federal Reserve took no action at its two-day meeting and officially moved monetary policy away from a tightening bias. However, policymakers signaled they aren’t ready to cut rates yet. “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” said the Fed statement.

Fed chief Powell was explicit, saying, “I don’t think it’s likely” that policymakers will feel confident enough by the March meeting, despite “six months” of good inflation figures. He said current policy is restrictive and believes it’ll make sense to ease at some point this year.

The stock market rally extended losses after the Fed announcement and especially Powell’s comments, closing near session lows. The Dow Jones Industrial Average fell 0.8% in Wednesday’s stock market trading, reversing lower from a fresh all-time high intraday. The S&P 500 index slumped 1.6%. The Nasdaq composite tumbled 2.2%, just below its 21-day moving average.

Microsoft fell 2.7% on Wednesday despite strong earnings and guidance. Google stock plunged 7.5% amid weak ad revenue growth. AMD stock declined 2.5%, but came well off lows despite in-line earnings and a weak revenue forecast. The reports from the three AI-infused tech giants took their toll on other techs. Meta stock sank 2.5% and Amazon shed 2.4%. AAPL stock slid 2%, its sixth straight loss.

The odds of a Fed rate cut in March fell to 36% on Wednesday evening, down from 40.4% on Tuesday. Markets had seen a 60% chance of a March cut shortly before the Fed announcement and Powell’s comments, due to weak economic data. There’s a 95% chance of a cut by May 1.

The 10-year Treasury yield slid 9 basis points to 3.965%, closing below 4% for the first time since Jan. 12. Before the open, a weaker-than-expected ADP employment report and Employment Cost Index brought yields down a few basis points. Treasury yields hit 3.94% intraday as New York Community Bancorp (NYCB) plummeted on a surprise Q4 loss due to a spike in loan-loss provisions as it faces stricter capital requirement.

U.S. crude oil prices fell 2.5% to $75.85 a barrel. Among growth ETFs, the iShares Expanded Tech-Software Sector ETF (IGV) slumped 2.2%, with MSFT stock a key holding. The VanEck Vectors Semiconductor ETF (SMH) gave up 1.4%. QCOM stock is an SMH holding, along with AMD.

Reflecting stocks with more speculative stories, the ARK Innovation ETF (ARKK) skidded 3.1% lower and ARK Genomics (ARKG) lost 3.3%. The SPDR S&P Metals & Mining ETF (XME) fell 1.6%, and U.S. Global Jets (JETS) descended 0.8%. The SPDR S&P Homebuilders ETF (XHB) and the Energy Select SPDR ETF (XLE) each stepped down 1.9%.

The stock market rally pulled back on Fed chief Powell, but the major indexes haven’t shown significant damage, at least so far. But stocks that flashed buy signals on Monday might be in trouble now. Earnings will remain intense Thursday, with the jobs report looming Friday. Those could provide catalysts for a market bounce or heavier selling. Investors should likely wait until the dust settles on Friday morning before considering new buys. They may want to exit recent entries and mull taking at least partial profits in various stocks, especially those with earnings due. That said, the current action could generate new setups in the coming days and weeks. So keep working on your watchlists. But also have your exit plans ready. Read The Big Picture every day to stay in sync with the market direction and leading stocks and sectors. Remember that markets often have a Day Two reaction to Fed meetings that reverses course. Also, Friday’s jobs report will put Fed chief Powell’s comments in fresh context. Generally speaking, let’s advise the readers about what’s happening beyond the article’s main content. Let’s unfold a lot of valuable details, which don’t directly match the original piece. This additional context demonstrates how we could surpass the existing report with superior storytelling!