On July 11th, the U.S. stock market experienced a violent fluctuation, a historic 'big reversal' between small-cap and large-cap tech stocks.
In the S&P 500 index, 396 stocks rose, but the overall index fell by 0.88%. Meanwhile, the S&P 500 equal weight index rose 1.17%, and the Russell 2000 small-cap index rose 3.57%, achieving its best single-day performance since November last year. This is also the largest difference between the overall performance of the S&P 500 index and the S&P 500 equal weight index since November 2020.
Some media analysis suggests that the collapse of the seven giant US stocks marks the beginning of a market 'great rotation'. The seven giants have suffered their largest decline since October 2022, dropping by 4.26%. Over the past five days, the seven giants have experienced a historic defeat, evaporating more than 1 trillion US dollars in market value.
In addition, the NASDAQ index also experienced its largest single-day decline since 2022, while small-cap stocks soared in reversal.
Looking back on history, during the bursting of the technology bubble in 2000, the market experienced similar fluctuations. Deutsche Bank's Jim Reid pointed out that at that time, tech stocks experienced a huge rotation, and the market's largest decline had not yet occurred.
Reid showed through a chart the situation before the bursting of the tech bubble in March 2000: defensive sectors such as consumer necessities, medical care, and utilities fell sharply, while tech stocks attracted a large amount of funds. When the bubble burst, funds quickly flowed back, causing the stock prices of defensive sectors to rise 35-45% by the end of the year compared to the bursting of the bubble in March.
Although the S&P 500 index fell 10% in the three weeks after the bursting of the bubble, it returned to the vicinity of the peak of the tech bubble by September. It was not until 2001 and 2002 that the market experienced a bigger decline, which coincided with the final economic downturn and corporate fraud scandals (such as Enron and WorldCom), and these scandals were only possible during the frenzy of the first tech bubble.
Reid believes that this historical phenomenon may be repeated.
'This makes one wonder what kind of major corporate fraud will emerge once the AI bubble bursts.'
Ultimately, the market values of tech companies and telecom companies fell by about 85% and 75%, respectively, from their peak at the end of 2002. At this time, consumer necessities were more than 25% higher than the peak of the tech in March 2000.
In fact, this time the situation is different. The seven giants are largely 'cash cows', generating billions of dollars in cash every quarter, and more importantly, their revenue and profit growth rates are far faster than the other 497 stocks.
Reid believes that although the overall position of the S&P 500 index is extremely high, this is driven by the extreme positioning of mega-cap growth stocks and tech stocks. The positioning of most other industries is at or below average levels. This difference reflects the recent profit growth achieved, with the former achieving a year-on-year growth of 38% in the first quarter, while the latter (i.e. other industries) only achieved a year-on-year growth of 2.5%.
Deutsche Bank analysts expect that:
This huge gap will narrow by year-end, with expected year-on-year growth of 30% and 7.5% in the second quarter... by year-end, both year-on-year growth rates will be around 10%, and the positioning should be adjusted accordingly, which will affect market rotation.
This is also as Reid pointed out, most U.S. stocks may rise by the end of the year, while the overall market may fall.
Edited by Jeffrey