By David Randall
NEW YORK (Reuters) – A broadening rally in US stocks offers an encouraging signal to investors worried about concentration in technology shares, as the market awaits key jobs data and the Federal Reserve is expected to cut rates in September.
While the market’s fortunes continue to rise and fall with big tech stocks such as Nvidia and Apple, investors are also putting money into less-loved value stocks and small caps, which are expected to benefit from lower interest rates. The Fed is expected to begin its rate cutting cycle at its monetary policy meeting on September 17-18.
Many investors see the broadening trend, which picked up steam last month before faltering during the early August sell-off, as a healthy development in the market rally led by a group of giant technology names. Chipmaker Nvidia, which has benefited from its bet on artificial intelligence, was only about a quarter of the S&P 500’s year-to-date gain of 18.4%.
“No matter how you slice and dice it, you’re looking at a pretty useful breadth and I think it has legs,” said Liz Ann Sonders, chief investment officer at Charles Schwab.
Value stocks are companies trading at a discount on metrics like book value or price-to-earnings and include sectors such as financials and industrials. Some investors believe the rally in the sector and small caps could go further if the Fed cuts borrowing costs while the economy remains healthy.
Market rotation has accelerated recently, with 61% of stocks in the S&P 500 outperforming the index in the past month, compared with a 14% gain over the past year, Charles Schwab data showed.
Meanwhile, a group of tech giants called the Magnificent Seven – which includes Nvidia, Tesla and Microsoft – has underperformed the other 493 stocks in the S&P 500 by 14 percentage points since the release of a weaker-than-expected US inflation report in July. 11, according to analysis by BofA Global Research.
Shares have also been held back after Nvidia’s forecast failed to meet high investor expectations earlier this week, another sign that investors may be looking to the technology. The equal-weighted S&P 500 index, a proxy for average stocks, hit a new record this week and is up about 10.5% year-to-date, narrowing the performance gap with the S&P 500.
“When the market is improving, the number of messages is increasing from stocks that are rallying in the expectation that the economic situation will support earnings growth and profitability,” wrote analysts at Ned David Research.
Stocks that have performed well this year include General Electric and midstream energy company Targa Resources, up 70% and 68%, respectively. The small-cap Russell 2000 index, meanwhile, is up 8.5% from the month’s lows, though it hasn’t breached July’s peak.
Next Friday’s non-farm payrolls report could help fuel a broader market rally if it shows the labor market is cooling steadily, though not alarmingly, said David Lefkowitz, head of US equities for UBS Global Wealth Management.
The job report “tends to be one of the market-moving releases in general, and now it will get more attention than normal.”
Investors are unlikely to turn down tech stocks, especially if volatility presents an opportunity to buy cheaply, said Jason Alonzo, a portfolio manager with Harbor Capital.
Tech stocks are expected to add above-market earnings every quarter through 2025, with third-quarter earnings at 15.3% compared with a 7.5% gain for the S&P 500 as a whole, according to LSEG data.
“People will sometimes take a deep breath after a good run and look at other opportunities, but technology is still the most obvious driver of growth, especially the theme of AI being innocent until proven guilty,” Alonzo said.
(Reporting by David Randall; Editing by Ira Iosebashvili and Richard Chang)
