With a rate cut in sight, a turning point has come to the US stock market! Will new sectors emerge, replacing the high-tech stocks?
Since July, $S&P 500 Index (.SPX.US)$ has accumulated a 0.44% decline, led by high-tech stocks. $Nasdaq Composite Index (.IXIC.US)$Has fallen by a cumulative 3.3%. On the other hand, the Dow Jones Average and the S&P 500 Equal Weight Index have been on an upward trend in July. Represented by value stocks $Dow Jones Industrial Average (.DJI.US)$Has risen by over 4% cumulatively, representing small-cap stocks $Russell 2000 Index (.RUT.US)$ Has also risen by nearly 10%.
Since signs of inflation cooling were seen in the Consumer Price Index on July 11, investors have been moving away from large tech stocks and showing a preference for a more diverse range of sectors. Economic cyclical sectors such as small-cap stocks, real estate stocks, and industrial stocks, which are more susceptible to the effects of the economy and interest rates, have been pushing up.
Among them, the US conglomerate $3M (MMM.US)$has shown a sudden rise of 20% after the earnings announcement and has risen by over 24% in the month. $Mohawk Industries (MHK.US)$ 、 $D.R. Horton (DHI.US)$ 、 $CBRE Group (CBRE.US)$ And other related stocks in the real estate industry are strong on the list.
Rotation trade characterized by a significant shift from high-tech stocks to small-cap and value stocks is highlighting the change in market sentiment. Investors are reassessing the balance of their portfolios and moving away from high-tech stocks that have dominated most of the past decade. This realignment is seen as a necessary step to sustain momentum. However, the interest rate stance of the Federal Reserve Board (FRB) has a significant impact on the market. Traders and analysts are closely watching for any indications in Chairman Powell's future statements, such as suggesting a rate cut in September, which could further accelerate the stock market rally.
Since the Consumer Price Index (CPI) showed signs of cooling inflation on July 11th, traders have been increasing sales of large-cap high-tech stocks and buying small-cap and value stocks. According to data from Bloomberg Intelligence, investors poured nearly $6 billion into U.S. listed exchange-traded funds (ETFs) focused on sectors other than high-tech, but fund inflows into high-tech ETFs remained at $1.4 billion.
Jimmy Lee, CEO of Wealth Consulting Group, noted, "If the FRB doesn't act quickly to cut rates, the hard-fought rally in the stock market could reverse." He is invested in high-tech and small-cap stocks in anticipation of a rate cut. He stated, "If Powell doesn't continue to take a stubborn attitude, there is further upside potential in this bullish market."
Market breadth is an extremely important factor for evaluating the soundness and sustainability of a rebound. Rallies driven by a small group of stocks (typically single sectors like high-tech) are often fragile, whereas a rebound that involves a wide range of sectors participating is considered stronger and more sustainable. The recent rotation to small-cap and value stocks suggests a broadening market participation, which bodes well for long-term growth.
Bank of America analysts believe that as inflation continues to cool, the focus of the FRB is expected to shift from inflation control to supporting economic growth. If economic growth slows down and the FRB turns to rate cuts, it should create nearly perfect market conditions for commodity, industrial product, energy, consumer discretionary sector, and some cyclical stocks in the high-tech sector.
Past data also supports this view, with the S&P 500 index rising an average of 5% in the year following the first rate cut after the end of a rate hike cycle. According to CFRA, the rate hike has also broadened, with the Russell 2000 index, representing small-cap stocks, rising 3.2% after 12 months.
In order to sustain the current trend, the policy decisions of the Federal Reserve (FRB) are crucial. Traders are betting that a rate cut cycle will soon begin and believe that such a move will support further gains in a wide range of stocks. However, the timing is crucial. Historically, the average period from the final rate hike to the first rate cut has been 9.2 months, and now, after 12 months have passed since the final rate hike in July 2023, the market is in an unstable position.
Nancy Tengler, CEO of Laffer Tengler Investments, said, "Significant interest rate cuts are needed for these small and medium-sized enterprises to benefit. With the economy doing well, I don't think such a thing will happen."
As history shows, in a relatively low inflation environment, it is beneficial to buy stocks at the end of a rate hike cycle, but the current market is more complex. The comments of Chairman Powell this week are crucial in determining whether long-term growth can be sustained or whether the market will face new volatility.
As Eric Bailey, Executive Managing Director of Steward Partners Global Advisory, says, "It is important for the FRB to take action, otherwise stock prices will become vulnerable in a seasonally weak and volatile period."
Source: Bloomberg, Dow Jones, moomoo
This article uses automatic translation in part.
-moomoo News Kouchi
This article uses automatic translation in part.
-moomoo News Kouchi
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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