As the "core engine" of this round of bull market in the US stock market, the market capitalization of the "Seven Giants" of the US stock market has evaporated by $1.1 trillion in the past five days, making it the largest five-day market capitalization reduction in nearly two years. Although Wednesday's sharp decline was due to unexpected factors such as Trump's speech severely impacting chip stocks, everyone couldn't help but ask this question:

Has the big rotation of US stocks already begun? Have leading technology giants already risen to their limit in terms of stock price in the past two years?

Some industry insiders are currently shifting their focus back to the "starting point" of this five-day "disaster situation": last Thursday.

Jim Reid, head of global economic and thematic research at Deutsche Bank, described it as a "fascinating day" in a latest report...

How special was that day?

On that day, 396 stocks in the S&P 500 index closed up, and the equal-weighted index rose by 1.17%. The small-cap stock index Russell 2000 index (+3.57%) achieved its best performance since November 2023. However, the overall S&P 500 index fell by 0.88% that day, which is the largest gap between the performance of the S&P 500 index and the equal-weighted index since Pfizer announced the favorable results of the vaccine phase III clinical trial in November 2020.

Of course, perhaps the more obvious driving signal for the beginning of the big rotation is the performance of the "seven giants" of the US stocks. The "seven giants" suffered a 4.26% slump last Thursday, the largest since October 2022 (a month before ChatGPT was launched). Even Goldman Sachs' research director admitted that the excessively high stock prices of the "seven giants" are the result of the AI bubble.

All of this ultimately evolved into the sharp drop of the Nasdaq 100 index yesterday, which experienced its largest single-day drop since 2022 on Wednesday.

Reference to the Internet bubble.

Regarding this, Jim Reid of Deutsche Bank said that only "very brave or foolish people" would be confident in the big rotation, but the current situation does remind me of the trend of 2000, when the height reached by technology stocks marked a huge rotation, and the market had not really started to plummet yet.

To emphasize this point, Reid shared the chart below, which shows the five sectors of the S&P 500 index with the greatest performance differences before and after the burst of the Internet bubble in 2000. The vertical line in the chart represents March 27, 2000, when technology stocks reached their peak, and the price at that time is used as the benchmark value (100) to measure the rise and fall of all sector indexes before and after.

Reid said that before technology stocks peaked, defensive sectors such as consumer goods, medical care, and utilities were all falling sharply, indicating that the market was rotating out of apparently stable and "boring" stocks and switching to more dynamic stocks; in fact, many people were initially shorting these "boring" sectors in order to invest more in technology stocks.

However, when technology stocks peaked on March 27, 2000, capital immediately flowed back into these defensive stocks. By the end of the year, the prices of these stocks had risen by 35%-45% compared to March!

Interestingly, for the overall S&P 500 index, although the index fell sharply by 10% in the three weeks after the bubble burst, it returned to near the high of the Internet bubble by September of that year, despite technology and telecom sectors falling by -10% and -25%, respectively.

After that, the declines in these two industries widened further, causing the S&P 500 index to experience a larger pullback, but the three defensive sectors continued to rise.

It was not until 2001 and 2002 that a deeper market decline occurred, which synchronously occurred with the US economic recession and corporate fraud scandals (such as Enron and WorldCom) at that time. These scandals may only have occurred under the frenzy of the first technology bubble (By the way, this makes people wonder what huge corporate fraud will occur once the AI bubble bursts).

In the end, the technology and telecommunications industries evaporated about 85% and 75% of their market capitalization respectively from their highs at the time to the lows at the end of 2002. And compared to the peak of the internet bubble in March 2000, the prices of essential consumer goods stocks still rose by 25%. Therefore, as Reid pointed out, the ultimate market rotation is significant!

Current Insights

History lesson stops here: Bulls may immediately argue that the internet bubble is completely different from the current AI bubble, because at that time almost no technology company in the bubble had a feasible business model or anything like positive cash flow. Indeed, from this perspective, this time is different:

Most of the "Seven Giants" are "cash cows" that produce tens of billions of dollars in cash every quarter, and more importantly, their revenue and bottom line growth rates are much faster than the other 493 stocks.

To this, Reid also acknowledges that the performance of the "Seven Giants" and other stocks reflects the difference in profit growth achieved in the near term, with the former achieving a year-on-year growth of 38% in the first quarter, while the latter (i.e. other industries) achieving only a year-on-year growth of 2.5%.

However, Reid also mentioned in the report that it is expected that this huge gap in profit growth rate will be narrowed by the second quarter and before the end of the year - the year-on-year growth rate of both sides is expected to reach around 10% by the end of the year, and the year-on-year growth rate of both sides in the second quarter is expected to be 30% and 7.5%, respectively. Position adjustments are also likely to follow, with a relevant impact on industry rotation.

Therefore, Reid's conclusion is that most stocks may rise before the end of the year, while the US stock market (large cap index) may decline...

Edited by Jeffrey