For a long time, the US stock market can be said to have been driven by the artificial intelligence (AI) boom and technology stocks. To put it simply, the sharp rise in US stocks is mostly due to the “Big Seven in Technology,” and the problem of excessive concentration has also caused quite a bit of controversy and concern.

The “Big Seven” have so much weight in the S&P 500 index that the strategists of the investment bank Piper Sandler wrote in a report released on June 3 that they will no longer set target prices for the S&P 500 index because the huge influence of these seven stocks means that the S&P 500 index can no longer represent the US stock market.

But now, it seems that the era of the “Big Seven Tech” dominating US stocks is slowly coming to an end, and the big rotation is finally beginning. The best performers in the US stock market on Tuesday were not only the S&P 500 and the Dow hit new highs, but also “small market capitalization strikes back” —$Russell 2000 Index (.RUT.US)$Defeated 3.5%.

Time went back a bit further to last week. The decline in large technology stocks on Thursday (11th) dragged down the NASDAQ and S&P 500, but weighted ETFs such as Invesco S&P 500$Invesco Exchange Traded Fd Tr S&P 500 Equal Weight Etf (RSP.US)$However, it rose more than 1%, and nearly 400 stocks in the S&P 500 index closed higher on the same day. Furthermore, the small-cap stock index Russell 2000 rose more than 3% on the same day.

Then last Friday (12th), Russell 2000 rose 1.1% again, outperforming the S&P 500 index. Weighted ETFs such as Invesco S&P 500 rose 0.9%, slightly higher than the S&P 500 index. Sectors that underperformed this year — especially real estate investment trusts, utilities, and consumer necessities — also rose.

As can be seen from this point, the recent US stock market can be described as “everything is rising.”

Are tech stocks “out of the limelight”?

Admittedly, the huge influence of a few stocks is neither an example in history, nor is it a phenomenon that will continue forever.

Legendary investor Rob Arnott (Rob Arnott), chairman of the investment agency Research Affiliates, said earlier that people may have forgotten that in the 1960 classic movie “The Magnificent Seven” (The Magnificent Seven), four of the seven people died in the end. When the internet bubble burst in 2000, many internet companies experienced a similar fate.

Looking at history, you can see that in fact, almost every decade had a “hegemon” who dominated the market at the time. However, no “leader” was that good, in the end, they were basically “beaten to death by the back wave.” Bridgewater conducted an interesting study on the history of the US market. They found that in the face of innovators, few companies or industries can maintain their position as dominators all the time.

Therefore, it is difficult not to doubt the recent performance of the US stock market: the popularity of technology stocks has slowly passed.

According to Goldman Sachs data, 7 of the 11 major sectors in the S&P 500 index experienced net outflows of capital last week, mainly in sectors such as information technology, communication services, and essential consumer goods. Cyclical stocks such as non-essential consumer goods, energy, utilities, and real estate were net capital purchases. The bank emphasized that hedge funds have been net selling information technology and communication services (TMT) stocks for four consecutive weeks.

Morgan Stanley also said in a recently released report that at a time when technology stocks are currently being sold off on a large scale, global hedge fund exposure to US software stocks hit a new low in many years last week.

“Among them, software stocks are the stocks with the highest net sales. This continues the sector's net sales momentum since the end of April and lowered risk exposure to a new low for many years.” The line wrote.

Which stocks are beneficial to large rotation?

First, small-cap stocks seem like a good option.

Dana D'Auria, Co-Chief Investment Officer of Envestnet, said, “If you participate in the AI investment boom, then you have gained significant AI exposure in market-weighted portfolios, so there's no need to double your bets. What you need to do now is diversify your investments and focus on international stocks and small-cap stocks.”

Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management, also said that small-cap stocks are expected to continue to benefit from the possibility that the Federal Reserve will cut interest rates. Falling interest rates will not only help the US economy become more stable, but will also help reduce financing costs for small-cap stocks.

“We are adjusting our portfolio. Tech stocks and artificial intelligence will continue to be areas of outstanding performance, but the rise in the stock market will extend to other stocks.” he said.

Matt Unger, portfolio manager at Osterweis Opportunity Fund, said, “Interest rate cuts benefit small-cap stocks. Earnings per share of small-cap stocks are expected to accelerate at that time.” His preferred stocks include aircraft leasing company FTAI Aviation, diagnostic testing equipment company Bio-Techne, and robotic surgery equipment manufacturer Procept Biorobotics.

Second, soft landing prospects+interest rate cuts will benefit cyclical stocks.

Bank of America strategist Ohsung Kwon pointed out in a report a few days ago that the lower-than-expected June CPI report is driving the “Goldilocks” economy into shape, which should benefit a specific sector of the US stock market: cyclical stocks. The bank said that as inflation continues to cool down, the Fed's focus will shift from curbing inflation to supporting economic growth.

In terms of economics, Golden Girl means an economy where high growth and low inflation coexist at the same time, and interest rates can be kept at a low level.

Kwon pointed out that as soon as economic growth slows down and the Federal Reserve starts cutting interest rates, then this should be an almost perfect scenario for cyclical stocks in the raw materials, industrial, energy and non-essential consumer goods industries, as well as some technology industries.

“The situation is rotating towards interest-sensitive cyclical stocks: interest rate pressure is easing, economic growth will eventually be supported by the Federal Reserve, and most importantly, corporate profits are expanding as 493 other companies get out of the profit recession.” he wrote.

“493 other companies” refers to shares of other companies in the S&P 500 index, excluding shares of Apple, Amazon, Alphabet, Microsoft, Nvidia, Tesla, and the Big Seven Meta.

Finally, value stocks.

Other than the three major indices, the “Big Seven,” and small-cap stocks, have you noticed that “stock god” Buffett is making a fortune. On Tuesday EST,$Berkshire Hathaway-A (BRK.A.US)$The intraday touched% to 0.6607 million dollars set a new all-time high. The stock has gained close to 22% this year so far.

The Berkshire Group is large and has dozens of insurance, energy, manufacturing, retail and service companies, so it is often seen as a microcosm of the overall US economy. Analysts generally believe that the recent continuous rise in Berkshire stock prices may reflect a gradual shift in the focus of US stocks from technology stocks to value stocks.

Furthermore, the S&P 500 Value Index (IVE) and Russell 1000 Value Index (RLV) have both risen about 3% over the past week after trading sideways for most of this year. And Berkshire is clearly representative of value stocks, and is also the largest constituent stock of the two major index ETFs mentioned above.

Wellington investment management analysts said that value stocks will perform well in the next three to five years, and structural inflation and rising real interest rates will contribute to the trend of US value stocks. Investors should pay more attention to the balance of their asset portfolios after experiencing a long-term rebound in growth stocks.

Jason Pride, head of investment strategy and research at wealth management company Glenmede, also believes that valuations of large-cap growth stocks have been hovering at a high level since this year, while current valuations of value stocks are relatively more reasonable.

Savita Subramanian, head of US stocks and quantitative strategy at Bank of America Merrill Lynch, said that the reasons for investors to increase their investment in cyclical industry value stocks are now more plentiful. She said, “Considering the macro environment, it will be large-cap value stocks that will lead the stock market to rise in the next few years.”

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