The value over growth switch really bared its teeth this week on expectation that the Fed will heavily reduce bond buying and rise official interest rates. US 10-year bond yields hit 1.9% and could soon rise over 2%. US markets put in another gloomy performance led by sharp declines for tech and small caps.

Both the Nasdaq Composite and Russell 2000, the main measure of US smaller companies, plunged into correction territory – 10% off all-time highs, while the key S&P 500 is now trading back in the pre-Santa rally range around 4,500 to 4,600.

Consumer defensives and utilities outperformed, with the likes of Procter & Gamble - the company behind Gillette and Braun shavers, Oral B, Olay, Vicks and Metamucil (the maker of healthy fibre supplements) all rallying. Large cap tech was soft again and even the megacaps (Alphabet, Amazon, Apple, Facebook and Microsoft) that have led a decade-long growth rally, are struggling against the tide.

Retail investors in the UK continue to buy the daily dips into those more profitable tech names, with Microsoft, Apple and Tesla all among the top 40 bought stocks this week, based on data from investment platform AJ Bell YouInvest.

Data shows that, historically, the S&P 500 has fallen 6% on average in the three months following the first interest rate hike in the cycle so with markets anticipating four or five Fed rate hikes this year, there could easily be further sharp pull backs in the S&P 500 and Nasdaq as 2022 progresses.

Reported this week: Goldman Sachs

Investment bank Goldman Sachs reported disappointing quarterly earnings on Tuesday (18 January 2022) continuing a trend of lacklustre bank results. Earnings of $10.81 came in way below consensus expectations pitched at $11.73 and were down 11% from a year earlier.

Similar to rivals JPMorgan Chase and Citigroup, Goldman also reported rising expenses, which hurt its bottom line, with the bank’s operating expenses surging 23% due to ‘significantly higher’ pay for employees, amid reports of a 40% to 50% jump in bonuses for its dealers. Investors are getting worried about how that might impact future profits, something that has by and large haunted the entire sector this reporting season, with only Wells Fargo bucking the trend.

Stock of the week: Microsoft/Activision Blizzard

Earlier this week, Microsoft announced the acquisition of troubled developer and publisher Activision Blizzard, a move that will see the Xbox maker become the third largest video game publisher in the world. The $68.7 billion deal, Microsoft’s largest ever, will pose a serious challenge to Sony’s status as the world’s second-largest video gaming company by revenue.

Whether or not the deal will end up restricting access to Activision’s games on Sony’s PlayStation console, the big rival to Microsoft’s Xbox, is yet to be seen and the deal is certain to face antitrust scrutiny ahead of the planned 2023 completion. But Tokyo traders aren’t waiting to find out what regulators might think, sparking the Japanese company’s stock to plunge 13%.

DISCLAIMER: Financial services company AJ Bell, referenced in this article, owns Shares magazine. The author (Steven Frazer) of this article own shares in AJ Bell. 

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Issue Date: 20 Jan 2022