news

Cailianshe News, July 17 (Editor: Huang Junzhi)For a long time, the US stock market can be said to be driven by the artificial intelligence (AI) boom and technology stocks. To put it simply, the surge in US stocks is basically attributed to the "Seven Big Tech Companies", and the problem of excessive concentration has also attracted a lot of controversy and concerns.

The "Big Seven"S&P 500The seven stocks are so heavily weighted in the index that strategists at Piper Sandler wrote in a June 3 report that they would no longer set price targets for the S&P 500 because the outsize influence of the seven stocks meant the index was no longer representative of the U.S. stock market.

However, now, the era of the "Seven Big Tech" dominating the U.S. stock market seems to be slowly coming to an end, and the big rotation is finally about to begin. The most eye-catching performance in the U.S. stock market on Tuesday was not only the S&P 500 and the Dow Jones Industrial Average hitting new highs, but also the "small-cap counterattack" - the Russell 2000 index surged 3.5%.

Going back a little to last week, the decline of large technology stocks on Thursday (11th) dragged down the Nasdaq and S&P 500, butInvescoThe Invesco S&P 500 Equal Weight ETF rose by more than 1%, and nearly 400 stocks in the S&P 500 index closed higher on the day. In addition, the Russell 2000 small-cap stock index rose by more than 3% on the day.

Then last Friday (12th), the Russell 2000 rose another 1.1%, once again outperforming the S&P 500. The Invesco S&P 500 Equal Weight ETF rose 0.9%, slightly higher than the S&P 500. Sectors that have lagged behind this year - especially real estate investment trusts, utilities and consumer staples - also rose.

From this we can see that the recent US stock market can be described as "everything is rising."

Is the tech sector’s “hit” over?

It is true that the huge influence of a few stocks is neither an isolated case in history nor a phenomenon that will continue.

Rob Arnott, a legendary investor and chairman of investment firm Research Affiliates, said that people may have forgotten that four of the seven people in the classic 1960 movie "The Magnificent Seven" died in the end. When the Internet bubble burst in 2000, many Internet companies suffered a similar fate.

Looking back at history, we can find that in fact, there are "dominants" who dominate the market in almost every decade. However, it is not easy to be a "leader", and in the end, they are basically "beaten to death by the waves behind". Bridgewater conducted an interesting study on the history of the US market and found that few companies or industries can maintain their dominant position in the face of innovators.

Therefore, it is hard not to doubt the recent performance of the U.S. stock market: the limelight of technology stocks has gradually passed.

Goldman SachsData from the Bank of America showed that seven of the 11 major sectors of the S&P 500 index experienced net outflows last week, mainly concentrated in sectors such as information technology, communication services and consumer staples, while cyclical stocks such as non-essential consumer goods, energy, utilities and real estate were net buyers. The bank emphasized that hedge funds have been net sellers of information technology and communication services (TMT) stocks for four consecutive weeks.

Morgan StanleyIt also stated in its latest report that amid the widespread sell-off in technology stocks, global hedge funds last weekAmerican SoftwareExposure to the sector hit a multi-year low.

"Software stocks were the largest net sellers, continuing the net selling momentum in the sector since late April and reducing risk exposure to a multi-year low," the bank wrote.

Which stocks benefit from the big rotation?

First, small-cap stocks appear to be a good choice.

“If you’ve participated in the AI ​​investing boom, you’ve already got a lot of AI exposure in your market-weighted portfolio, so there’s no need to double down,” said Dana D’Auria, co-chief investment officer at Envestnet. “What you need to do now is diversify and focus on international stocks and small-cap stocks.”

Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management, also said that small-cap stocks are expected to continue to benefit from the possibility of the Federal Reserve cutting interest rates. Lower interest rates will not only help the U.S. economy become more stable, but also help reduce the financing costs of small-cap stocks.

"We are rebalancing the portfolio and tech and AI will continue to be outperforming sectors, but the gains in the stock market will be broadened to other stocks," he said.

"A rate cut is good for small-cap stocks, which are expected to see faster earnings growth," said Matt Unger, portfolio manager of the Osterweis Opportunity Fund. His top picks include aircraft leasing company FTAI Aviation, diagnostic testing equipment company Bio-Techne androbotSurgical device maker Procept Biorobotics.

Second, the prospect of a soft landing + rate cuts will benefit cyclical stocks.

Ohsung Kwon, a strategist at Bank of America, pointed out in a report a few days ago that the lower-than-expected June CPI report is driving the formation of the "Goldilocks" economy, which should benefit a specific sector of the U.S. stock market: cyclical stocks. The bank said that as inflation continues to cool, the Federal Reserve's focus will shift from curbing inflation to supporting economic growth.

In economics, Goldilocks refers to an economic state in which high growth and low inflation coexist within an economy and interest rates can be maintained at a low level.

Kwon noted that as long as economic growth slows and the Federal Reserve starts cutting interest rates, it should be a near-perfect scenario for cyclical stocks in the materials, industrial, energy and consumer discretionary sectors, as well as parts of the technology sector.

“The tide is turning toward rate-sensitive cyclical stocks: rate pressures are easing, economic growth will eventually be supported by the Fed, and most importantly, corporate earnings are expanding as the other 493 companies emerge from earnings recession,” he wrote.

The “other 493 companies” refer to the S&P 500 components, excludingapple、Amazon、Alphabet、Microsoft, Nvidia, Tesla and other stocks of the Meta Seven.

Finally, value stocks.

In addition to the three major indexes, the "Big Seven" and small-cap stocks, have you noticed that the "stock god" Buffett is quietly making a fortune. On Monday, Eastern Time, Berkshire Hathaway Class A shares closed up 2.11% to $652,997, exceeding the previous high of $647,039 set in February this year, setting a new record high. The stock has risen 20.12% so far this year.

Berkshire Hathaway is a large company with dozens of insurance, energy, manufacturing, retail and service companies under its umbrella, so it is often seen as a microcosm of the overall U.S. economy. Analysts generally believe thatBerkshireThe recent continuous rise in stock prices reflects that the focus of US stocks may be gradually shifting from technology stocks to value stocks.

In addition, the S&P 500 Value Index (IVE) and the Russell 1000 Value Index (RLV) both rose about 3% in the past week after trading sideways for most of the year. Berkshire is clearly a representative of value stocks and is also the largest component of the above two index ETFs.

Wellington Investment Management analysts said that value stocks will perform well in the next three to five years, and structural inflation and rising real interest rates will help the trend of value stocks in the US stock market. After experiencing a long-term rebound in growth stocks, investors should pay more attention to the balance of their asset portfolios.

Jason Pride, head of investment strategy and research at wealth management firm Glenmede, also believes that valuations of large-cap growth stocks have been hovering at high levels this year, while value stocks are currently valued more reasonably.

Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Merrill Lynch, said investors now have more reason to increase their investments in cyclical industry value stocks. She said, "Given the macro environment, it will be large-cap value stocks that will lead the stock market in the next few years."