U.S. stocks sank, extending the S&P 500's worst two-day drop since June, amid disappointing results at JPMorgan Chase & Co. and signs hedge funds were dumping the bull market's best performers.
The S&P 500 fell 0.9% to 1,815.78, closing at its lowest level in two months. The gauge has slipped 2.6% this week, the biggest weekly loss since 2012. The Nasdaq Composite Index dropped 1.3%, extending its biggest two-day retreat since 2011, and the Dow Jones Industrial Average slid 141.03 points, or 0.9%, to 16,029.19. Trading in S&P 500 shares was 26% above the 30-day average at this time of day.
“You need to shake out some of the speculative money and throw water on the irrational exuberance,” said Randy Frederick, managing director of trading and derivatives at the Charles Schwab Corp., which manages $2.2 trillion in client assets. “It's a good reminder that markets don't go straight up. While the long term is positive, we need to have these steps back along the way. We need this kind of pullback.”
The S&P 500 declined 2.1% Thursday and the Nasdaq Composite slumped 3.1%, its biggest decline since November 2011. Technology shares slid Thursday as investors sold the biggest winners in the five-year market rally. A gauge of Internet stocks tumbled the most since 2011 yesterday, while biotechnology shares approached a bear market.
The percentage of hedge-fund bets that stocks will rise has decreased to 46%, compared with 2014's high of 58%, according to an April 9 research note from Credit Suisse Group AG. Net exposure in the U.S. declined to the lowest level since August 2012, the report said.
“So far, exposure reductions have been measured and at least for the time being, there has been no mass rush for the exits,” Credit Suisse's Jon Kinderlerer wrote. “Unsurprisingly, we have seen exposure being trimmed the most in information technology where the popular longs have underperformed significantly over the last few weeks.”
Companies with high levels of hedge fund ownership have fallen about twice as much as the overall market. S&P 500 stocks that are most popular among the speculators have fallen 7.8% since April 2. The U.S. equity benchmark is down 3.9% since then.
Hedge funds make up at least 30% of the shareholders in Allegion Public Limited Co., Dollar General Corp. and Constellation Brands Inc., the most among companies in the S&P 500. About 37% of Allegion shares are owned by hedge funds, the most among S&P 500 companies. The maker of security systems is almost 9% lower since April 2. H&R Block Inc., the tax software provider, is down 11% and is about 27% owned by hedge funds.
The sell-off that began last week was sparked by growing concern that valuations may be too high as earnings season begins. The Nasdaq Composite trades at 35 times reported earnings of the companies in the index. That's double the ratio for the S&P 500, which trades at about 17 times earnings.
Profit for members of the S&P 500 probably fell 0.9% in the first quarter, analysts now forecast, after anticipating a 6.6% rise in January. Sales increased 2.6%, according to projections.
Analysts have reduced earnings estimates more than they usually do over the last three months, according to strategists led by David Kostin at the Goldman Sachs Group Inc. Average profit forecasts for S&P 500 companies fell about 4% in the first quarter, a percentage point more than normal, they wrote.
Alcoa Inc. unofficially started the earnings season on April 8 with profit that beat forecasts. About 54 companies in the S&P 500 are scheduled to report results next week, including Coca-Cola Co., Goldman Sachs, Yahoo! Inc., Google Inc. and General Electric Co.
“We can still get decent earnings, but all in all, the total level of earnings will probably not grow as much as expected,” said Nicola Marinelli, who helps oversee $200 million at Sturgeon Capital Ltd. in London. “Earnings will have subdued growth. Equity market can remain strong but that doesn't mean much stronger.”