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Cailianshe News, July 18 (Editor: Xiaoxiang)As the "core engine" of this round of US stock bull market, the market value of the "Big Seven" in the US stock market has evaporated by a total of 1.1 trillion US dollars in the past five days, setting a record for the largest five-day market value reduction in the past two years. Although the sharp drop on Wednesday was due to the sudden factor of Trump's speech hitting chip stocks, everyone can't help but ask this question:

Has the big rotation of US stocks begun? Have the technology giants that have dominated the market for nearly two years reached the end of their growth?

In this regard,Some industry insiders are currently turning their attention back to the "starting point" of this five-day "disaster market": last Thursday.

Deutsche BankJim Reid, global head of economics and thematic research, described it in a recent report as"A fascinating day"...

How special is this day?

On that day,S&P 500396 stocks in the index closed higher, the equal-weighted index rose 1.17%, and the small-cap Russell 2000 (+3.57%) posted its best performance since November 2023. However, the S&P 500 as a whole fell 0.88% on the day, its worst day since November 2020.PfizerThis is the largest gap between the performance of the S&P 500 and the S&P 500 Equal Weight Index since the announcement of promising preliminary results from the Phase 3 clinical trial of the vaccine.

Of course, the more obvious driving signal of the start of the big rotation may be the performance of the "Big Seven" in the US stock market - the "Big Seven" plunged 4.26% last Thursday, which was the biggest drop since October 2022 (a month before ChatGPT was launched).Goldman SachsResearch directors at Bloomberg all admit that the ridiculously high stock prices of the "Big Seven" are the result of an artificial intelligence bubble.

All of this eventually evolved into yesterday, and further evolved intoNasdaq 100The index's plunge - which posted its biggest one-day drop since 2022 on Wednesday.

References during the Internet bubble

In this regard, Deutsche Bank's Reed said that perhaps "only very brave or stupid people" would be confident in the talk of a big rotation, but the current situation does remind me of the trend in 2000, when the peak of technology stocks marked a huge rotation, and the market had not yet started to really fall.

To emphasize this point, Reed shared the following image,This chart shows the five sectors with the largest performance differences in the S&P 500 index before and after the bursting of the Internet bubble in March 2000. The vertical line in the chart is when technology stocks peaked on March 27, 2000, and the price at that time is used as the benchmark value (100) to measure the rise and fall changes of all sector indexes before and after.

Reed said that before the tech peak, defensive sectors such as consumer staples, healthcare and utilities had been falling sharply, indicating that the market was rotating out of seemingly stable, "dull" stocks and into dynamic stocks; in fact, many people were initially shorting these "dull" sectors in order to put more money into tech stocks.

However, when technology stocks peaked on March 27, 2000, funds immediately shifted back into these defensive stocks, and by the end of the year, the prices of these stocks had risen 35%-45% from March!

Interestingly, for the overall S&P 500, while the index plunged 10% in the three weeks following the bubble peak, by September of that year it was back near its dot-com highs, even though the tech and telecom sectors were down -10% and -25% respectively.

Since then, the two sectors have fallen further, leading to a larger correction in the S&P 500, but the three defensive sectors have continued to rise.

It wasn’t until 2001 and 2002 that a deeper market decline occurred, coinciding with the then-current US recession and corporate fraud scandals (such as Enron and WorldCom) that were perhaps only possible in the frenzy of the first tech bubble (side note: this makes one wonder what huge corporate fraud will emerge once the AI ​​bubble bursts).

Ultimately, the technology and telecom sectors lost about 85% and 75% of their value, respectively, from their peak to their low in late 2002. Consumer staples were still up 25% from the dot-com bubble peak in March 2000. So, as Reed points out, the final market rotation was significant!

Current Implications

So much for the history lesson: Bulls will immediately point out that the dot-com bubble was nothing like the current AI bubble because almost no tech companies in the bubble had viable business models and anything resembling positive cash flow.Indeed, from this perspective, this time is different:

Most of the "Big Seven" are "cash cows" that generate tens of billions in cash every quarter. More importantly, their revenue and bottom-line growth rates are much faster than the remaining 493 stocks.

Reed acknowledged that the divergence in performance between the Big Seven and other stocks reflects the recent difference in earnings growth, with the former achieving 38% year-over-year growth in the first quarter and the latter (i.e. other industries) achieving only 2.5% year-over-year growth.

However, Reed also mentioned in the report that this huge earnings growth gap is expected to narrow in the second quarter and by the end of the year.——In the second quarter, the year-on-year growth rates of the two are expected to be 30% and 7.5% respectively; by the end of the year, this gap will even be completely eliminated, and the year-on-year growth rates of both parties are expected to reach about 10%. Position adjustments should also follow, and have a relevant impact on industry rotation.

therefore,Reid concluded that most stocks are likely to rise by the end of the year, while the U.S. stock market (the broad index) is likely to fall...