The broadening rally in U.S. stocks offers an encouraging signal to investors worried about concentration in technology stocks, as markets await key jobs data and rate cuts expected by the Federal Reserve in September.
As markets seesaw with big tech stocks like Nvidia NVDA.O and Apple AAPL.O, investors are also pouring into less-loved yield stocks and small caps, which should benefit from lower interest rates. The Fed is expected to kick off a rate-cutting cycle at its Sept. 17-18 policy meeting.
Many investors view the broadening trend, which accelerated last month before running out of steam in a selloff in early August, as a healthy development in a stock rally led by a group of tech giants. Chipmaker Nvidia, which has benefited from its bets on artificial intelligence, has accounted for about a quarter of the S&P 500’s 18.4% gain so far this year.
“No matter how you look at it, you’ve seen a pretty significant broadening and I think that makes sense,” said Liz Ann Sonders, chief investment officer at Charles Schwab.
Value stocks are companies that trade at a discount to metrics such as book value or price-to-earnings ratio and include sectors such as financials and industrials. Some investors believe the rally in these sectors and small caps could continue if the Fed cuts borrowing costs while the economy remains healthy.
The market rotation has accelerated recently, with 61% of stocks in the S&P 500 .SPX outperforming the index over the past month, compared with 14% outperforming over the past year, according to data from Charles Schwab.
Meanwhile, the “Magnificent Seven” group of tech giants — which includes Nvidia, Tesla TSLA.O and Microsoft MSFT.O — has underperformed the other 493 stocks in the S&P 500 by 14 percentage points since a weaker-than-expected U.S. inflation report was released on July 11, according to an analysis by BofA Global Research.
Stocks also held up after Nvidia’s guidance missed investors’ lofty expectations earlier this week, another sign that investors may be looking beyond the tech sector. The equal-weight S&P 500 index, a gauge of the average stock, hit a new record high (last week) and is up about 10.5% year to date, narrowing its performance gap with the S&P 500.
“When market breadth improves, the message is that a growing number of stocks are rallying on expectations that economic conditions will support earnings growth and profitability,” write analysts at Ned David Research.
Among the yield stocks that have performed well this year are General Electric GE.N and midstream energy company Targa Resources TRGP.N , which have gained 70% and 68%, respectively. The small-cap Russell 2000 index has gained 8.5% from its lows this month, though it hasn’t surpassed its July peak.
The jobs report “tends to be one of the most influential releases in the market overall, and right now it’s going to get even more attention than usual.”
Investors are unlikely to turn their backs on tech stocks, especially if volatility gives them a chance to buy low, said Jason Alonzo, portfolio manager at Harbor Capital.
Tech stocks are expected to post market-beating earnings growth in every quarter through 2025, with third-quarter earnings rising 15.3%, compared with a 7.5% increase for the broader S&P 500, according to LSEG data.
“People sometimes take a deep breath after a great run and look for other opportunities, but technology remains the most obvious growth driver, especially the AI theme which is innocent until proven guilty,” Alonzo said.
USA voanews
