The S&P 500’s longest winning streak since November came to an abrupt end on Thursday, driven by a significant drop in megacap tech stocks. Investors pulled out of the so-called Magnificent 7—Apple Inc. (NASDAQ:AAPL), Microsoft Corp. (NASDAQ:MSFT), Nvidia Corp. (NASDAQ:NVDA), Alphabet Inc. (NASDAQ:GOOG), Amazon.com Inc. (NASDAQ:AMZN), Meta Platforms Inc. (NASDAQ:META), and Tesla Inc. (NASDAQ:TSLA)—in what marks the largest exit in nearly a year. This shift was triggered by inflation data that spurred bets on the Federal Reserve cutting interest rates as soon as September.
Impact on the Market
The rotation out of this year’s tech winners resulted in notable market movements. The S&P 500 dropped 1% despite 400 of its members rallying. A version of the index that removes market-cap bias surged 1.2%, outperforming the weighted index by the most since November 2020. Meanwhile, the Russell 2000 Index, which includes companies with lower credit ratings and higher borrowing needs, jumped 3.2%, marking its best performance relative to the S&P 500 since March 2020. Additionally, a Bloomberg index tracking the Magnificent 7 tumbled as much as 4.1%, its biggest decline since July 2023.
Market Sentiment and Reassessment
According to Alexander Morris, CEO of F/m Investments, the market is using this moment to reassess investment allocations. “Folks use this as the moment to say ‘here’s a good point to reassess whether this is the only place we should be allocated’,” Morris said. He emphasized that while this shift may not form a long-term trend, it underscores the market’s search for new opportunities beyond the top tech names.
Performance of Big Tech and Alternatives
The Nasdaq 100, which advanced 23% this year through Wednesday, added more than $6 trillion in market value. However, the rotation from big tech comes as investors explore alternatives amid potential interest rate cuts by the Fed. Official data showed inflation cooled broadly in June to its slowest pace since 2021, signaling to policymakers that rate cuts could be on the horizon. This pushed a Goldman Sachs index of profitless technology stocks, typically burdened by higher debt, up by 3.3%.
Homebuilders like DR Horton Inc. (NYSE:DHI), PulteGroup Inc. (NYSE:PHM), and Lennar Corp. (NYSE:LEN) were among the biggest gainers in the S&P 500 on Thursday, reflecting investor interest in sectors poised to benefit from lower rates. Utilities in the benchmark also gained 2%, headed for their best day since April.
Tesla’s Robotaxi Delay
Adding to the tech sector’s woes, Tesla announced a delay in its planned Robotaxi unveiling, a crucial event for the company. The shares fell as much as 8.3%, contributing to the overall decline in tech stocks. The delay is seen as a setback for investors who had been optimistic about Tesla’s autonomous vehicle advancements.
Conclusion
The recent big tech market drop and subsequent investor rotation highlight the dynamic nature of the stock market. With inflation data suggesting potential Fed rate cuts, investors are exploring new opportunities beyond the dominant tech stocks. This shift underscores the importance of diversification and staying attuned to broader economic signals.
As the market continues to adjust, sectors like homebuilding and utilities may see increased interest. Meanwhile, the tech sector, particularly companies like Tesla with high expectations pinned on their innovations, will remain in focus. The evolving landscape presents both challenges and opportunities for investors navigating the shifting market dynamics.
Featured Image: Freepik
