Anticipated US rate cuts drive investors beyond Big Tech

NEW YORK:

Looming U.S. rate cuts present investors with a tough choice: stick with Big Tech stocks that have led returns for more than a year, or turn to less-loved areas of the market that could benefit from easing monetary policy.

Owning technology and development giants such as Nvidia, Microsoft and Amazon has been a highly profitable strategy for investors since early 2023, even though the stock’s dominance of the market has drawn comparisons to the dot-com bubble of the late 2000s. 1990s.

That calculus may begin to change after Thursday’s surprisingly tepid inflation report boosted expectations for a near-term rate cut by the Federal Reserve. Lower rates are seen as beneficial for many corners of the market that have underperformed this year, including small caps, real estate and economically sensitive areas such as industrials.

Market action at the end of the week indicated that a nascent change may have already begun. The tech-heavy Nasdaq 100 suffered its biggest drop of the year on Thursday, while the small-cap Russell 2000 had its best day of 2024. The Nasdaq 100 has gained about 21% this year while the Russell 2000 is up just 6%.

Also on Thursday, the equal-weighted S&P 500 – a proxy for the average stock in the benchmark – had its biggest relative gain since 2020 against the S&P 500, which is more influenced by the biggest technology and growth stocks. That wiped out the huge upside for the S&P 500, which remains up about 18% in 2024 versus a 6.7% gain for the equally weighted index.

“The trade became very one-sided and we’re seeing some reversal of that,” said Walter Todd, Chief Investment Officer at Greenwood Capital.

Small caps and the even-weighted S&P 500 extended gains on Friday, even as tech stocks rallied.

Investors warned the moves could be a sharp reversal after the gap in performance between tech and other market sectors widened. In addition, recent periods of market expansion have been short-lived: for example, small caps surged in late 2023 when investors believed rate cuts were imminent, only to lag in the following months.