U.S. Stocks Recovered Following a Technology-led Selloff

U.S. stocks rose on May 5, after a technology-led selloff a day earlier, with growth stocks recovering some losses spurred after a key policymaker suggested interest rates might need to increase to prevent an economic overheating. To understand why stocks rose on Wednesday, it is important to know what happened on Tuesday.

On Tuesday, the S&P 500 dropped amid selling in Big Tech and other high-growth stocks. The broad market index fell 0.7% to 4,164.66 after falling 1.5% at its low. Pressure on some largest technology companies sent the Nasdaq Composite down 1.9% to 13,633.50.

The tech giant Apple dropped 3.5% and Google-parent Alphabet fell 1.6%. Facebook also declined as well as Tesla. Investors did not spare the market’s chipmakers as well, as Nvidia and Intel lost 3.3% and 0.6%, respectively.

The Dow Jones Industrial Average was able to strengthen its position thanks to strong performance in Dow Inc and Caterpillar. The 30-stock benchmark added 19.08 points or 0.1% to 34,133.03 after dropping more than 300 points at one point on May 4.

Reasons for downward pressure varied, but a mix of concerns about rising inflation as well as fears the Federal Reserve may have to taper monetary stimulus affected the situation. The potential for tax increases in the coming months also created issues.

U.S. stocks and risk factors

The Nasdaq Composite added 0.9%, after the index dropped 1.9% during Tuesday’s regular session for its worst day since March. The S&P 500 and Dow Jones Industrial Average also advanced.

The sharp move lower in growth stocks came after Treasury Secretary Janet Yellen’s suggestion. Yellen clarified her position. A near-term interest rate hike was not something Yellen was predicting or recommending as that decision lies with the Federal Reserve.

Nevertheless, some companies have said that surging demand and supply chain shortages pushed prices higher. Mentions of inflation on first-quarter earnings jumped by 800% year-on-year. To some extent, the market is now taking a bit of a pause at this point when it comes to stocks. Plus, as stocks reached record highs last week, equities were vulnerable to a pull-back at the slightest trigger. And as the first-quarter earnings season winds down, investors will be left to think about the future policy landscape, which may be somewhat less constructive for corporate profits.