Tech Stock Slump, Small Cap Rise Good Signs for Bull Market

We research all brands listed and will earn a fee from our partners. Research and financial considerations may influence how brands are displayed. Not all brands are included. Learn more.

Investors could also be jittery in regards to the ongoing selloff in tech stocks, but there is 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 a few of the biggest losers being market darlings Nvidia (-8.18%), Amazon (-5.20%) and Alphabet (-3.03%). However the incontrovertible fact that shareholders are liquidating their positions in Big Tech does not 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.

Ads by Money. We could also be compensated in the event you click this ad.Ad

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 in a position to muster a gain of 0.83% through the primary six months of the yr.

Nevertheless, that is all modified over the past several weeks. Since July 1, the Russell 2000 — which tracks the smallest 2,000 stocks within the small cap Russell Index — has gained 7.66%, outpacing every major index. In contrast, over the identical 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 only one indication that the present 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 likely to persist.” Subramanian noted that many corporations within the Russell 2000 are currently undervalued. “Their valuations are at levels that will warrant a reasonably equitable comeback,” he said.

Stock market sector rotation

the broader picture, the S&P 500 is not suffering losses across the board. The truth is, of its 11 sectors, only tech is within the red over the past month, having seen losses of $900 billion in market value this week alone. This implies investors are recognizing that while one sector could also be perceived as overvalued, the rest are seemingly undervalued — and value buying.

This trend of inflows into value stocks in sectors like financials, energy and real estate could persist because the likelihood of a September rate cut (currently pinned at 98.1%) by the Federal Reserve continues to achieve momentum. Over the past month, those three sectors have seen gains of 4.89%, 5.36% and 5.41%, respectively.

To date this week, the largest 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 present bull market — which began in earnest in October 2022 — is gaining broad-based strength and is not being solely propelled by overinflated AI and tech stocks.

Ultimately, it is a sign of strength that may provide buy-and-hold investors — including even those with holdings in tech — a little bit of relief.

Ads by Money. We could also be compensated in the event you click this ad.Ad