The rotation out of tech stocks intensified Friday after a botched software update from cybersecurity provider CrowdStrike Holdings (CRWD) caused Microsoft (MSFT) Windows computer systems to crash globally. Disappointing earnings reports from several blue chips also weighed on equities.
Markets finished a wild week decisively in the red after the largest internet outage in history caused chaos at financial institutions, hospitals, airlines and numerous other industries. Friday's massive IT failure added fuel to the selloff in tech stocks – particularly the Magnificent 7 stocks that have contributed the majority of the bull market's returns.
The move out of pricey tech stocks saw the tech sector of the S&P 500 lose 1.5%. Consumer discretionary stocks, materials and energy sector names also led the market's decliners.
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"It's been a volatile, mostly down week with stocks rotating from tech to small caps, then surprisingly back the other way," writes the markets team at Argus Research. "The massive, global IT glitch was not a welcome ending to a summer Friday. Wall Street is all in red and trying to shake off the week and get prepped for next week."
By the closing bell, the tech-heavy Nasdaq Composite declined 0.8% to 17,726, while the broader S&P 500 fell 0.7% to 5,505. Disappointing quarterly earnings from two blue-chip components helped the Dow Jones Industrial Average drop 377 points, or 0.9%, to 40,287.
Travelers, American Express slide
Travelers (TRV), which ranks low among analysts' ratings of all 30 Dow Jones stocks, lost 7.8% after quarterly revenue missed Wall Street's forecast. Compounding the damage, the insurer said catastrophe losses rose almost 2% to $1.51 billion, citing "severe wind and hail storms" across the eastern and central regions of the U.S.
The report prompted CFRA Research to cut its recommendation on TRV to Hold from Buy, citing claims from Friday's IT outage, among other factors.
"While these results, including an 11% rise in earned premiums and improved underwriting results, are positive, we attribute TRV's weakness today to industry-wide concerns over claims set to emerge from the IT outage, as well as TRV's disappointing Q2 production trends," analyst Cathy Seifert wrote in a note to clients. "We believe these rates of growth lag many peers and will lead to an erosion in underwriting profitability, removing a catalyst from the shares."
American Express (AXP, -2.7%), which is one of Warren Buffett's top stocks, likewise took a hit after reporting quarterly revenue that came up short of Street estimates. AXP posted earnings of $4.15 per share, which easily topped analysts' forecast for $3.24 a share.
Although revenue from card fees topped $2 billion for the first time in the most recent quarter, total revenue net of interest expense came only to $16.3 billion. Analysts expected revenue to hit $16.6 billion in the period.
"We are maintaining our Buy rating on American Express following second-quarter earnings, which were helped by continued strength in billed business," wrote Argus Research analyst Stephen Biggar. "Rising stock market and home equity values, along with greater interest income from bond portfolios, remain tailwinds for consumer spending for this billed-business cohort."
Cybersecurity stocks are still a buy
CrowdStrike Holdings (CRWD) stock shed 11.1% after sparking a spectacular global internet outage, but analysts say the knee-jerk trading is almost certainly overdone. True, crashing the net is bad, but at least the company didn't suffer an actual security failure.
"Our experts tell us that CrowdStrike is widely perceived as a premier cybersecurity provider, admired for its leadership in innovation as well as its track record," said Jordan Berger, analyst at global research firm Third Bridge. "Despite any associated impact to CrowdStrike's brand, the most significant aspect of today's CrowdStrike outage may be the fact that the outage was in fact not tied to any security incident or breach, and as such the company’s security track record remains untarnished for now."
The analyst added that the degree to which CRWD's face-plant helps competitors such as Palo Alto Networks (PANW, +2.2%) and SentinelOne (S, +7.8%) is unclear, "especially considering the amount of effort required to replace a large security provider."
The bottom line is that spending on global cybersecurity is rising fast – and that makes the best cybersecurity stocks worth a closer look.
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