A broadening rally in U.S. stocks is providing a positive signal for investors concerned about the heavy reliance on technology shares, as the market looks ahead to key jobs data and the Federal Reserve’s expected rate cuts in September. While major tech stocks like Nvidia and Apple have dominated market movements, investors are increasingly turning to value stocks and small-cap companies, which are poised to benefit from anticipated lower interest rates.
The Federal Reserve is expected to begin a rate-cutting cycle during its monetary policy meeting on September 17-18. This has led to a rotation in the market, with a growing number of investors putting money into less-loved sectors such as financials and industrials, as well as small-cap stocks. This shift, which gained momentum last month but faced a setback during an early August sell-off, is seen as a healthy development in a market rally that has so far been led by a handful of large tech companies.
Nvidia, a key player in the artificial intelligence boom, has accounted for roughly a quarter of the S&P 500’s 18.4% year-to-date gain. However, the market’s recent broadening is reflected in the fact that 61% of stocks in the S&P 500 have outperformed the index over the past month, compared to just 14% over the past year, according to data from Charles Schwab.
The so-called “Magnificent Seven” group of tech giants, including Nvidia, Tesla, and Microsoft, has underperformed the other 493 stocks in the S&P 500 by 14 percentage points since a weaker-than-expected U.S. inflation report on July 11, according to BofA Global Research. This underperformance, coupled with the resilience of stocks after Nvidia’s recent earnings forecast fell short of lofty expectations, suggests that investors may be starting to look beyond the tech sector.
The equal-weight S&P 500 index, which serves as a proxy for the average stock, reached a new high this week and is up around 10.5% year-to-date, narrowing its performance gap with the broader S&P 500. Analysts at Ned Davis Research noted that improving market breadth indicates that more stocks are rallying on the expectation that economic conditions will support earnings growth.
Value stocks that have performed well this year include General Electric, up 70%, and midstream energy company Targa Resources, up 68%. The Russell 2000 index, focused on small-cap stocks, is up 8.5% from its lows earlier this month, though it has yet to surpass its July peak.
Next Friday’s non-farm payrolls report could further bolster the case for a broader market rally if it indicates a steady cooling of the labor market. While tech stocks remain attractive, particularly during periods of volatility, the recent market rotation suggests that investors are exploring opportunities beyond the tech sector, even as technology continues to be a significant growth driver, particularly with the ongoing focus on artificial intelligence.
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