Investors may be jittery with reference to the continued selloff in tech stocks, but there may be a silver lining: The recent developments actually signify strength for the bull market.
This week, the S&P 500‘s tech sector has fallen by -5.20%, with just a few of the most important losers being market darlings Nvidia (-8.18%), Amazon (-5.20%) and Alphabet (-3.03%). Nevertheless the incontrovertible incontrovertible fact that shareholders are liquidating their positions in Big Tech doesn’t imply the stock market overall is in bad shape.
Moderately, what we’re seeing is a dramatic shift in sector rotation and the rise of small-cap corporations, demonstrating a more broad-based bull market that won’t solely reliant on optimism around AI.
Small caps join the party
While the foremost indices have been having fun with a banner yr, corporations with small market capitalizations have largely been left on the sidelines. The Dow, Nasdaq and the S&P 500 have set dozens of all-time highs in 2024, while the small-cap index was only able to muster a gain of 0.83% through the first six months of the yr.
Nevertheless, that’s all modified over the past several weeks. Since July 1, the Russell 2000 — which tracks the smallest 2,000 stocks inside the small cap Russell Index — has gained 7.66%, outpacing every major index. In contrast, over the similar period, the Dow is up 2.73%, the S&P 500 has gained 0.69%, and the tech-heavy Nasdaq-100 is down -1.30%.
This is just one indication that the current bull market is now expanding beyond the so-called Magnificent Seven stocks (Alphabet, Amazon, Apple, Microsoft, Meta, Nvidia and Tesla), which currently account for 31% of the weighted S&P 500.
Bank of America’s head of U.S. equity and quantitative strategy Savita Subramanian told Yahoo! Finance the trend in small caps is “more more likely to persist.” Subramanian noted that many corporations inside the Russell 2000 are currently undervalued. “Their valuations are at levels that can warrant a fairly equitable comeback,” he said.
Stock market sector rotation
the broader picture, the S&P 500 will not be suffering losses across the board. The reality is, of its 11 sectors, only tech is inside the red over the past month, having seen losses of $900 billion in market value this week alone. This suggests investors are recognizing that while one sector may be perceived as overvalued, the remainder are seemingly undervalued — and value buying.
This trend of inflows into value stocks in sectors like financials, energy and real estate could persist since the likelihood of a September rate cut (currently pinned at 98.1%) by the Federal Reserve continues to realize momentum. Over the past month, those three sectors have seen gains of 4.89%, 5.36% and 5.41%, respectively.
So far this week, the biggest winners in those sectors are Equity Residential (3.66%), Capital One (4.31%) and oilfield services provider Schlumberger (6.84%).
This sector rotation into value stocks and the simultaneous rise of small caps is evidence that the current bull market — which began in earnest in October 2022 — is gaining broad-based strength and will not be being solely propelled by overinflated AI and tech stocks.
Ultimately, it is an indication of strength which will provide buy-and-hold investors — including even those with holdings in tech — somewhat little bit of relief.
More from Money:
Nvidia’s CEO Is Selling 1000’s and hundreds in Company Stock. Is the AI Bubble About to Burst?
5 Best Stock Trading Apps of 2024
3 Ways to Spend money on Sports, From Nike to Manchester United