A turning point has arrived in the US stock market with a view to interest rate cuts! Has a new sector emerged after defeating high-tech stocks?

Since signs of inflation cooling down were visible in the consumer price index on 7/11, investors have moved away from major high-tech stocks and preferred more diverse sectors. Business cycle sectors such as small-cap stocks, real estate stocks, and industrial stocks, which are easily affected by the economy and interest rates, showed a catch up.

Rotating trades from tech stocks to new sectors
Rotation trading, which is characterized by a drastic shift from high-tech stocks to small-cap stocks and value stocks, highlights changes in market sentiment. Investors are rebalancing their portfolios and withdrawing from tech stocks that have dominated most of the past decade. This readjustment is seen as a necessary step to sustain the upward momentum. However, the Federal Reserve (Fed) interest rate stance has a major impact on the market. Traders and analysts are paying attention to future statements by Fed Chairman Powell, and there is a possibility that stock appreciation will be further accelerated if there is a statement suggesting interest rate cuts in September.

Since 7/11, when the consumer price index (CPI) showed signs of inflation cooling down, traders have strengthened their sales to large high-tech stocks and purchases into small-cap stocks and value stocks. According to Bloomberg Intelligence data, investors invested close to 6 billion dollars into US exchange-traded funds (ETFs) focusing on non-high-tech sectors, but the inflow of funds into high-tech ETFs remained at 1.4 billion dollars.

Market breadth is important
The breadth of the market is an extremely important factor in evaluating the soundness and sustainability of the rebound. Rally due to a small number of stock groups (typically a single sector such as high-tech stocks) is often vulnerable, and in contrast to this, a rebound involving a wide range of different sectors is seen as stronger and more sustainable. The recent rotation into small-cap stocks and value stocks suggests that market participation is expanding, which is encouraging for long-term growth.

Bank of America analysts believe that inflation will continue to cool down, and the focus of the Fed will shift from controlling inflation to supporting economic growth. If economic growth slows and the Fed turns to cutting interest rates, it should be an almost perfect market environment for raw materials, industrial products, energy, consumer discretionary sectors, and some business cycle stocks in the high-tech sector.

Past data also supports this view, and the S&P 500 index has risen an average of 5% in the year after the first rate cut after the end of the interest rate hike cycle. According to the CFRA, the range of interest rate hikes has also expanded, and the Russell 2000 Index has risen 3.2% after 12 months as a representative of small-cap stocks.

The key to maintaining current trends
In order for current trends to continue, it is important for the Federal Reserve (Fed) to make policy decisions. Traders are betting that the interest rate reduction cycle will soon begin, and they believe that such a move will support a further rise in a wide range of stocks. However, that timing is very important. The average period from the final rate hike to the first rate cut was historically 9.2 months, and now that 12 months have passed since the final interest rate hike in 2023/7, the market is in an unstable position.

As history shows, in an environment of relatively low inflation, it is beneficial to buy stocks at the end of an interest rate hike cycle, but the current market is more complicated. Chairman Powell's remarks this week are extremely important in determining whether long-term gains can be maintained or whether the market will face new fluctuations.