The stock market has recovered most of the losses incurred during the summer sell-off. While the S&P 500 Index has rebounded before, this time is unique because it is not led by Big Tech; instead, it’s everyone else’s turn.
Technology giants like Nvidia Corp. and Microsoft Corp. have led the stock benchmark gains for much of the past two years, with investors drawn to their booming profits and exposure to artificial intelligence. But now traders are turning to sectors like real estate, utilities and consumer staples amid fears of sputtering economic growth and as the Federal Reserve prepares to start lowering interest rates so soon Wednesday.
Since the S&P 500 peaked on July 16, the so-called Magnificent Seven technology stocks — Nvidia, Microsoft, Apple Inc., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Tesla Inc. – largely collapsed, with the Bloomberg Magnificent 7 Index down 5.3%. And while the broader stock benchmark is down less than 1% in that period, largely due to the S&P’s outsized weightings in these fast-growing tech giants, typically sleepy sectors have led the index by a wide margin, with both real estate and utilities leading by 11% achieved. %.
These numbers include last week’s rally in the S&P 500, which was led by the technology sector.
“Investors like to watch companies that go from earnings declines to earnings gains,” Michael Casper, an equity strategist at Bloomberg Intelligence, said in an interview. “That kind of takes them away from technology and toward the other 493 stocks that have been pushed aside.”
Recession test
This rotation was supported by expectations for monetary policy easing. But it’s also evidence of the improving profit outlook in the rest of the market, at a time when big spending by tech giants is raising concerns about their margins.
Whether it is a temporary trend or a longer-term trend will likely depend on the course of the economy. Markets will get a big clue on this from the Fed this week, with traders broadly divided over the central bank’s quarter or half point cut.
“We don’t believe we are entering a recession, and the stocks that will show leadership are the cyclical stocks that will benefit from higher economic growth and lower interest rates,” said Adam Grossman, Chief Investment Officer for Global Equities at Riverfront Investment Group, who added that big tech stocks remain his firm’s largest overweight position.
A downturn in the economy would likely benefit defensive sectors, but that also tends to be a good environment for technology stocks, said Keith Lerner, co-chief investment officer at Truist Advisory Services.
“If there is any uncertainty, we believe investors will continue to pay a premium for the growth prospects,” Lerner said in an interview. “If things continue to slow down, the defense would continue to do well. In both environments, with slowdowns or still some stability, I think technology does a good job.”
Another factor helping industries outside of technology is the improvement in earnings prospects. Take healthcare as an example: After seven straight quarters of shrinking profits, healthcare companies’ profits rose 16% in the second quarter, according to data compiled by Bloomberg Intelligence. This expansion is expected to continue for the remainder of the year, with earnings growth expected to reach 45% in the first quarter of 2025.
Technology slows down
Of course, tech giants’ revenues remain strong. They’re just not rising at the rapid levels of the past few years, which were driven by steady revenue growth and a focus on efficiency that resulted in hundreds of thousands of job losses across the sector.
The Magnificent Seven companies posted 36% profit growth in the second quarter. That is impressive, but lower than the more than 50% in the previous three quarters. And according to BI data, profits are expected to grow 17% to 20% over the next four quarters.
Part of the selloff in Big Tech stocks last month was tied to the companies’ high spending on equipment used for AI computing. Last quarter, Amazon, Google parent company Alphabet, Microsoft and Meta Platforms together invested more than $50 billion in capital expenditures.
A big beneficiary of all that money flying around is Nvidia, whose semiconductors are prized for the types of computing needed for AI models. But more broadly, it has also raised concerns among investors about profit margins at the chipmaker’s biggest customers — especially since there is little sign so far that the spending is translating into the kind of revenue growth needed to financially justify the spending.
Although the recession has driven down the prices of many technology stocks, they are still high. For Microsoft, for example, the price is 32 times expected earnings for the next twelve months, down from a high of 35 in July, but well above the average of 25 over the past decade.
Cheaper valuations in other parts of the market will likely continue to attract investors. That doesn’t mean the technology won’t continue to do well, despite the boom in AI-related stocks like Nvidia, which is drawing comparisons to the dot-com bubble, said Michael Mullaney, director of global market research at Boston Partners.
“The other 493, which is a lot cheaper, will probably get a bid, but that doesn’t mean you’re throwing the baby out with the bathwater,” he said. “These companies are printing money like crazy. That is a big difference from 2000.”
