Skip to main content

Pedestrians stand in front of an electronic stock price indicator in Tokyo on April 7, 2014. Internet and technology stocks tumbled across Asia as a sell-off spread from Wall Street.Shizuo Kambayashi/The Associated Press

The damage among the superstars of the technology sector has spread to the broader market, walloping major indexes worldwide in one of the more dramatic downturns this year.

Stocks took a drubbing Monday, a day before companies start to report their quarterly earnings in the United States. The S&P 500 closed at 1,845.04, down 20.5 points or 1.1 per cent, in a widespread selloff that hit consumer discretionary stocks, energy producers, financials and industrials.

Outside the U.S., European stocks fell 1.4 per cent, Canada's S&P/TSX composite index fell 0.9 per cent and Japan's Nikkei 225 fell 1.7 per cent.

The moves follow a hair-raising sell-off on Friday – though largely limited to U.S. tech stocks – when the S&P 500 fell 24 points or nearly 1.3 per cent, for its biggest one-day retreat in two months.

There is no shortage of suspects to fault for the sudden turnaround just days after the S&P 500 touched a record high.

Much of the blame had initially been directed at high-priced technology stocks, such as Google Inc. and Facebook Inc., which fell particularly hard on Friday.

As well, fingers have pointed to a slowing Chinese economy, the looming end of U.S. monetary stimulus and new tensions between Ukraine and Russia – this one involving something called the Donetsk People's Republic.

But the real culprit is far more obvious and considerably broader in scope: The stock market simply isn't looking too attractive.

The overall damage is slight; the U.S. benchmark index has fallen just 2.4 per cent from its high last Wednesday.

But it's enough to raise the usual questions about the bull market's staying power, especially as the downturn catches other sectors of the market.

Part of the problem is that the S&P 500 has enjoyed a remarkably smooth ride, rising to a series of record highs over the past year without sustaining a correction of 10 per cent or more in nearly three years.

On average, the stock market corrects about every year-and-a-half.

The steady gains have raised some concerns about valuations. The average stock in the S&P 500 trades at more than 17 times its estimated earnings, according to Goldman Sachs, even as analysts and companies have been slashing their earnings estimates.

For the first quarter reporting season, which officially starts on Tuesday evening, the forecast is for earnings to fall about 1 per cent year-over-year.

That marks a substantial reversal from 8.5-per-cent earnings growth in the fourth quarter.

Bullish observers believe companies will clear the lowered expectations, setting up the market for rallies ahead – especially if it becomes clear that the cold winter disrupted economic activity.

"Given that weather has likely obscured the trend in growth, we think investors will look through this quarter's results and focus on forward-looking guidance … now that the weather has begun to improve," said Savita Subramanian, equity and quantitative strategist at Bank of America, in a note.

Recent economic news has supported this idea. U.S. job gains in March were upbeat, and manufacturing activity rebounded slightly.

However, the market still faces other obstacles.

Profit margins are at record-high levels, which will limit earnings growth even if the margins are maintained.

There are also signs of ebullience, marked by the flurry of companies hitting the markets through initial public offerings this year.

IPO activity totalled more than $47-billion in the first quarter, nearly double the level in the first quarter of 2013.

Thirty-six IPOs were driven by venture capitalists, or the highest number since the dying days of the technology bubble in 2000, an unsettling comparison that could suggest insiders are keen on cashing out at the top of the market.

Some new stocks are struggling though. King Digital Entertainment PLC, maker of the popular Candy Crush Saga game, has fallen more than 18 per cent from its debut in March.

Twitter Inc., which went public in November, has fallen 42 per cent from its record high in December.