Investors braced over high valuation stocks
The wrenching sell-off in US high-growth technology and biotech shares could leave investors braced for more than a minor pull-back when earnings pick up speed.
First-quarter earnings estimates have fallen sharply as many companies have blamed the brutal winter for weak outlooks.
With high-valuation stocks under pressure, earnings could be subjected to even more investor scrutiny than usual.
"There's scepticism among investors about the outlook, and we're getting into the first-quarter earnings season, so you're going to see some positioning," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.
Profit growth for Standard & Poor's 500 companies is now expected to have increased just 0.9pc in the first quarter from a year ago, down from a January 1 forecast for 6.5pc growth, Thomson Reuters data showed.
This week, 54 S&P 500 companies are scheduled to report first-quarter earnings. In comparison, 29 companies in the S&P 500 had reported results on Friday.
Earnings are coming in from high-profilers General Electric, Johnson & Johnson, Goldman Sachs, Google and IBM.
Wall Street received more readings on the US economy in this week, the Federal Reserve Bank of Philadelphia's business activity index today – the same day that the latest weekly initial jobless claims will also be released.
This flurry of numbers will come during a four-day week. The US stock market will be closed for Good Friday.
A move into blue chips is one trend emerging after the market's slide, which pushed the Nasdaq on Friday to a close below 4,000 for the first time since February 3.
The Nasdaq Composite Index is down 4.7pc for the month so far, while the Dow Jones industrial average is down 2.6pc and the S&P 500 is down 3pc.
"You've seen small caps dominate," Jacobsen said, referring to some of Wall Street's one-time darlings.
"We're going to begin to see large caps dominate now, as people shift more from high-beta plays to quality."
Despite the selloff, data so far shows investors are still pouring money into stocks.
Investors in US-based funds put $8.9 billion into stock funds in the week ended April 9, the biggest net inflows in four weeks.
At the same time, funds that mostly hold US Treasuries reported outflows for the first time in four weeks, according to data from Thomson Reuters' Lipper service on Thursday.
Yet, biotechs have been slammed. The Nasdaq biotechnology index has fallen for the seventh straight week. The biotech index is down about 21pc from its record closing high on February 25.
The last time it fell for seven straight weeks was in the summer of 1998.
Part of what's behind the big momentum selloff may be nervousness surrounding the Federal Reserve's December decision to scale back its economic stimulus, or quantitative easing.
"We've had basically five years of a market that's been nannied by the Federal Reserve," said Quincy Krosby, market strategist at Prudential Financial. "Now as we get closer and closer to the end of QE, I think traders and hedge funds are being very careful and selective."