By David Randall
NEW YORK (Reuters) – A broader rally in U.S. stocks offers an encouraging signal to investors worried about concentration in technology stocks as markets await key employment data and expected Federal Reserve rate cuts in September.
While the market’s fortunes continue to rise and fall with big tech stocks like Nvidia (NASDAQ:) and Apple (NASDAQ:), investors are also pouring money into less favored value stocks and small caps, which are expected to benefit from lower interest rates. . The Fed is expected to start a rate cutting cycle at its monetary policy meeting on September 17 and 18.
Many investors view the broader trend, which gained momentum last month before faltering during the early August sell-off, as a healthy development in a market rally led by a cluster of giant tech names. Chipmaker Nvidia, which has benefited from bets on artificial intelligence, alone is responsible for about a quarter of the S&P 500’s 18.4% gain this year.
“Any way you look at it, you’ve seen some pretty meaningful broadening and I think there’s something to that,” said Liz Ann Sonders, Chief Investment Officer at Charles Schwab (NYSE:).
Value stocks are shares of companies that trade at a discount to metrics such as book value or price-to-earnings ratios, and include sectors such as financials and industrials. Some investors believe that rallies in these sectors and small caps could accelerate even further if the Fed lowers borrowing costs while the economy remains healthy.
The market’s rotation has accelerated lately, with 61% of stocks in the S&P 500 outperforming the index in the past month, compared to 14% that outperformed in the past year, according to data from Charles Schwab.
Meanwhile, the so-called Magnificent Seven group of tech giants – including Nvidia, Tesla (NASDAQ:) and Microsoft (NASDAQ:) – have underperformed the other 493 stocks in the S&P 500 since the release of a weaker index. then expected US inflation report on July 11, according to an analysis by BofA Global Research.
Stocks also held steady after a forecast from Nvidia earlier this week fell short of investors’ high expectations, another sign that investors may be looking beyond technology. Equal weighting, a measure of the average stock, hit a new record high this week and is up about 10.5% this year, narrowing its performance gap with the S&P 500.
“As market breadth improves, the message is that an increasing number of stocks are recovering based on expectations that economic conditions will support earnings growth and profitability,” Ned David Research analysts wrote.
Value stocks that have performed well this year include General Electric (NYSE:) and midstream energy company Targa Resources (NYSE:), which are up 70% and 68%, respectively. The small-cap-focused index, meanwhile, is up 8.5% from the month’s low, though it hasn’t breached its July peak.
This Friday’s nonfarm payrolls report could bolster the case for a broader market rally if it shows the labor market is cooling at a steady but not alarming pace, says David Lefkowitz, head of US equities at UBS Global Wealth Management .
The jobs report “is generally one of the most market-moving publications, and at this point it will receive even more attention than usual.”
Investors are unlikely to turn their backs on technology stocks, especially if volatility gives them an opportunity to buy cheap, said Jason Alonzo, portfolio manager at Harbor Capital.
The tech stocks are expected to post above-market earnings growth every quarter through 2025, with third-quarter earnings coming in at 15.3%, compared to 7.5% earnings growth for the S&P 500 as a whole, according to LSEG data.
“People sometimes take a deep breath after a good run and look at other opportunities, but technology is still the clearest driver of growth, especially the AI theme, which is innocent until proven guilty,” Alonzo said.
