By David Randall
NEW YORK (Reuters) – A broadening rally in U.S. stocks is offering an encouraging signal to investors apprehensive about concentration in technology shares, as markets await key jobs data and the Federal Reserve’s expected rate cuts in September.
Because the market’s fortunes keep rising and falling with big tech stocks corresponding to Nvidia and Apple, investors are also putting money in less-loved value stocks and small caps, that are expected to learn from lower rates of interest. The Fed is predicted to kick off a rate-cutting cycle at its monetary policy meeting on Sept. 17-18.
Many investors view the broadening trend, which picked up steam last month before faltering during an early August sell-off, as a healthy development in a market rally led by a cluster of giant tech names. Chipmaker Nvidia, which has benefited from bets on artificial intelligence, alone has accounted for roughly 1 / 4 of the S&P 500’s year-to-date gain of 18.4%.
“Regardless of the way you slice and dice it you might have seen a fairly meaningful broadening out and I feel that has legs,” said Liz Ann Sonders, chief investment officer at Charles Schwab.
Value stocks are those of firms trading at a reduction on metrics like book value or price-to-earnings and include sectors corresponding to financials and industrials. Some investors consider rallies in these sectors and small caps could go further if the Fed cuts borrowing costs while the economy stays healthy.
The market’s rotation has recently accelerated, with 61% of stocks within the S&P 500 outperforming the index previously month, in comparison with 14% outperforming over the past yr, Charles Schwab data showed.
Meanwhile, the so-called Magnificent Seven group of tech giants – which incorporates Nvidia, Tesla and Microsoft – have underperformed the opposite 493 stocks within the S&P 500 by 14 percentage points for the reason that release of a weaker-than-expected U.S. inflation report on July 11, in line with an evaluation by BofA Global Research.
Stocks have also held up after an Nvidia forecast failed to satisfy lofty investor expectations earlier this week, one other sign that investors could also be looking beyond tech. The equal weight S&P 500 index, a proxy for the common stock, hit a fresh record this week and is up around 10.5% year-to-date, narrowing its performance gap with the S&P 500.
“When market breadth is improving, the message is that an increasing variety of stocks are rallying on expectations that economic conditions will support earnings growth and profitability,” analysts at Ned David Research wrote.
Value stocks which have performed well this yr include General Electric and midstream energy company Targa Resources, that are up 70% and 68%, respectively. The small-cap focused Russell 2000 index, meanwhile, is up 8.5% from its lows of the month, though it has not breached its July peak.
Next Friday’s non-farm payrolls report could help bolster the case for a broader market rally if it shows the labor market is cooling at a gentle, though not alarming pace, said David Lefkowitz, head of U.S. Equities for UBS Global Wealth Management.
The roles report “tends to be certainly one of the more market moving releases usually, and immediately it is going to get much more attention than normal.”
Investors are unlikely to show their back on tech stocks, particularly if volatility gives them a likelihood to purchase on the low cost, said Jason Alonzo, a portfolio manager with Harbor Capital.
Technology stocks are expected to post above-market earnings growth over every quarter through 2025, with third-quarter earnings coming in at 15.3% compared with a 7.5% gain for the S&P 500 as an entire, in line with LSEG data.
“People will sometimes take a deep breath after a pleasant run and have a look at other opportunities, but technology remains to be the clearest driver of growth, particularly the AI theme which is innocent until proven guilty,” Alonzo said.
(Reporting by David Randall; Editing by Ira Iosebashvili and Richard Chang)