Big Tech Leader Microsoft Holds the Key to U.S. Stock-Market Direction

The fate of the U.S. stock market currently rests on the shoulders of Microsoft Corp., the front-runner of the Big Tech companies. According to Bank of America strategists, led by Michael Hartnett, Microsoft's performance is pivotal in determining the stock market's trajectory.

Described as the "Yul Brynner" of their self-proclaimed "Magnificent Seven," Microsoft's ability to maintain its recent highs is crucial. Failure to do so could cause a shift in the equity and credit narrative from a "buy-the-dip" approach in the first half of 2023 to a "sell-the-rip" mentality in the second half of the year.

Microsoft has faced challenges in reaching new highs after peaking at $359.49 per share on July 18. The company's aggressive pricing strategy for its AI tools, a significant driver of this year's tech-led gains in the stock market, contributed to its struggle. While Microsoft's stock has witnessed a 32% increase thus far in 2023, it has experienced a decline of over 5% in August.

The group known as the Magnificent Seven, comprising stocks that played a crucial role in the first-half stock rally, includes Meta, Microsoft, Apple Inc., and Nvidia Corp. These companies, along with Tesla Inc., have all experienced corrections, with shares dropping at least 10% from their recent peaks. Furthermore, Tesla Inc. finds itself in a bear market, currently down by over 20% from its recent high.

The Stock Market's Recent Struggles

The overall stock rally has faced challenges in recent weeks due to concerns over several factors. Among these concerns are the potential for U.S. interest rate hikes and the surge in Treasury yields. Additionally, worries about China have been prominent, especially with the news of property developer Evergrande filing for U.S. bankruptcy protection.

China's Troubles

Leading financial institution Goldman Sachs has acknowledged that this is no longer a "buy-the-dip market." Experts, such as Hartnett and his team, have raised concerns about the situation in China. They have described a "shocking" list of issues currently plaguing the country, including eroding stock gains, youth unemployment, and a decrease in China's holdings of U.S. Treasurys. In fact, these holdings are at their lowest point since June 2009. Furthermore, the risks associated with property developers and the impact on shadow banking are also cause for worry.

A Potential "Credit Event" in China

Bank of America strategists have highlighted the risk of a "credit event" in China, which has already spooked global markets. However, they anticipate that any such event would prompt a significant international policy response. In this context, despised U.S. stocks like real estate investment trusts serve as the best hedge. These stocks would prove valuable if policy makers manage to alleviate concerns by reducing bond yields and stabilizing the Chinese renminbi.

The Need for a Beijing Rescue Plan

The collapse of China Evergrande has further emphasized the need for a substantial rescue plan worth $1 trillion, according to a strategist from Clocktower. The severity of the situation is underscored by China setting its yuan fix at its largest gap to estimate on record.