The stock market has largely recovered from the losses experienced during its summer selloff. While the S&P 500 Index has previously shown resilience, this instance is distinctive as it is not driven by Big Tech; instead, other sectors are taking the lead.
For the past two years, technology giants such as Nvidia Corp. and Microsoft Corp. have significantly contributed to the equities benchmark’s gains, drawing investors with their robust profits and artificial intelligence exposure. However, traders are currently shifting their focus to sectors like real estate, utilities, and consumer staples amidst concerns of sluggish economic growth and anticipation of the Federal Reserve potentially cutting interest rates as soon as Wednesday.
Since the S&P 500’s peak on July 16, the so-called Magnificent Seven tech stocks — Nvidia, Microsoft, Apple Inc., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., and Tesla Inc. — have experienced declines, resulting in a 5.3% drop in the Bloomberg Magnificent 7 Index. Despite the broader equities benchmark falling less than 1% over this period, real estate and utilities have made significant gains of 11%, surpassing usually dormant sectors.
This data includes last week’s rally in the S&P 500, led by the tech sector. According to Michael Casper, an equity strategist at Bloomberg Intelligence, investors are gravitating towards companies transitioning from earning declines to gains, moving away from tech to other often-ignored stocks.
The shift has been influenced by expectations of monetary policy easing and the improved profit outlook across various market sectors at a time when large tech companies’ heavy spending raises concerns about their margins. Whether this shift represents a temporary change or a longer-term trend will likely depend on the economic trajectory, with significant insights expected from the Federal Reserve this week regarding potential rate reductions.
Adam Grossman, Chief Investment Officer for global equities at Riverfront Investment Group, expressed a belief that economic growth and lower interest rates would benefit cyclical stocks. However, he noted that his firm continues to overweight large cap tech stocks. Meanwhile, Keith Lerner, Co-Chief Investment Officer at Truist Advisory Services, suggested that defensive sectors would thrive alongside tech stocks in either a slowing or stable economic environment.
Improving earnings outlooks for non-tech sectors also play a crucial role. For example, health care companies reported a 16% earnings increase in the second quarter after seven consecutive quarters of declining profits, with expectations of continued growth.
Despite strong earnings from tech giants, their growth rate has decelerated from the rapid pace seen over the past few years, which was driven by steady sales growth and efficiency improvements that led to widespread job cuts. The Magnificent Seven reported a 36% profit increase in the second quarter, down from over 50% in the preceding three quarters, with expected growth rates between 17% and 20% in the next four quarters.
The recent decline in Big Tech stocks is partly due to heavy spending on AI computing equipment. Companies like Amazon, Alphabet, Microsoft, and Meta Platforms collectively invested over $50 billion in capital expenditures last quarter. This significant spending benefits Nvidia, but it also raises investor concerns about the impact on profit margins for major tech customers, especially since the revenue growth necessary to justify this spending has yet to materialize.
Despite the downturn reducing valuations for many tech stocks, they remain high. For instance, Microsoft is priced at 32 times the projected profits over the next 12 months, down from a high of 35 in July but still above the decade average of 25. This may continue to attract investors to cheaper stocks outside the tech sector, although technology is expected to perform well despite the AI-driven stock boom.
Michael Mullaney, Director of Global Market Research at Boston Partners, emphasized that while cheaper market areas might attract some investment, the significant profits generated by tech companies distinguish the current situation from the dot-com bubble of 2000.
