Investors Rejoice as U.S. Stock Rally Broadens Amid Tech Concerns - What This Means for Your Portfolio
By David Randall
In a positive sign for investors worried about the heavy concentration in technology stocks, a broadening rally in U.S. stocks is gaining momentum as markets await key jobs data and the Federal Reserve's anticipated rate cuts in September.
As big tech names like Nvidia and Apple continue to sway the market's performance, investors are diversifying their portfolios by putting money into undervalued value stocks and small caps, which are poised to benefit from lower interest rates. The Fed is set to kick off a series of rate cuts at its upcoming monetary policy meeting on Sept. 17-18.
This broadening trend, which surged last month before stalling during an early August market dip, is seen as a healthy development in a market rally dominated by a handful of tech giants. Chipmaker Nvidia, buoyed by its AI investments, alone has contributed about a quarter of the S&P 500's year-to-date gain of 18.4%.
According to Liz Ann Sonders, chief investment officer at Charles Schwab, "No matter how you slice and dice it, you have seen a pretty significant broadening out and I think that has legs."
Value stocks, which are shares of companies trading at a discount based on metrics like book value or price-to-earnings ratios, include sectors such as financials and industrials. Some investors believe that rallies in these sectors and small caps could extend further if the Fed lowers borrowing costs while the economy remains robust.
The market rotation has accelerated recently, with 61% of stocks in the S&P 500 outperforming the index in the past month, compared to just 14% outperforming over the past year, as per Charles Schwab data.
Meanwhile, the Magnificent Seven tech giants, including Nvidia, Tesla, and Microsoft, have lagged behind the other 493 stocks in the S&P 500 by 14 percentage points since a weaker-than-expected U.S. inflation report on July 11, according to BofA Global Research.
Stocks have held steady even after Nvidia's forecast fell short of investor expectations earlier this week, signaling that investors may be shifting their focus away from tech. The equal weight index, a measure of the average stock performance, hit a new record this week and is up around 10.5% year-to-date, narrowing its performance gap with the S&P 500.
Analysts at Ned David Research highlighted that "When market breadth is improving, the message is that an increasing number of stocks are rallying on expectations that economic conditions will support earnings growth and profitability."
Value stocks that have performed well this year include General Electric and midstream energy company Targa Resources, which have seen gains of 70% and 68%, respectively. The small-cap focused Russell 2000 index is up 8.5% from its lows of the month, though it has not exceeded its July peak.
Next Friday's non-farm payrolls report could further bolster the case for a wider market rally if it indicates a cooling labor market at a steady pace, according to David Lefkowitz, head of U.S. Equities for UBS Global Wealth Management.
Investors are unlikely to abandon tech stocks, especially if volatility presents buying opportunities. Technology stocks are expected to outperform the market in earnings growth through 2025, with third-quarter earnings projected at 15.3% compared to a 7.5% gain for the S&P 500 as a whole, according to LSEG data.
As investors navigate this evolving market landscape, it's important to consider diversifying portfolios to include value stocks and small caps alongside tech investments. By staying informed and adjusting investment strategies accordingly, individuals can capitalize on market trends and potentially enhance their financial outcomes.