As stock traders' confidence in the Fed's first rate cut since this round of interest rate hikes grows stronger, stocks other than the "Magnificent Seven" (which have boosted stock prices since 2023), especially mid-small cap stocks, have been on the rise.

Therefore, in the eyes of some traders who are extremely optimistic about the U.S. stock market in the future, this healthy "rotation market" has catalyzed the bullish wave that the market will usher in a new bull market, which is expected to continuously set new highs for the S&P 500 index.

The Magnificent 7, which occupy a high weight in the S&P 500 index, include:$NVIDIA (NVDA.US)$,$Apple (AAPL.US)$,$Microsoft (MSFT.US)$,$Alphabet-C (GOOG.US)$,$Tesla (TSLA.US)$,$Amazon (AMZN.US)$and $Meta Platforms (META.US)$After the stock prices skyrocketed in the second half of 2023 and the first half of this year, they have all retreated since July.

Global investors continue to flock to the seven big tech giants led by NVIDIA in 2023 and the first half of 2024, mainly because they see these cash-rich giants as a "safe haven" in the face of uncertain interest rate expectations and an economic slowdown. They also bet on the global enterprise frenzy that is betting heavily on the generation of AI, which has placed Apple, Google, and other giants in the best position to expand their revenue using AI.

The U.S. bull market has seen a "comprehensive rotation" and urgently needs the participation of the Magnificent Seven.

But in the eyes of some more cautious strategists, the current "rotation market" in the U.S. stock market cannot be considered a typical "comprehensive rotation" that signals a bull market. In their view, the current surge in small and mid-cap stocks is a "style switch" in the market that signals the start of a new bull market, which requires that the Magnificent Seven, whose stock prices have suffered heavy losses in the past, participate closely. Strategists generally agree that this style shift can help eliminate the so-called "AI bubble" to some extent, without causing sustained declines in the S&P 500 index.

The current market style shift from the seven big tech giants with high valuations to those without them, that is, outside of the giant stock market, means that if market funds do not flow back to the seven big tech giants that account for up to 35% of the S&P 500 index, the style will continue to focus on small and mid-cap stocks that have suffered heavy losses since the rate hike cycle began in 2022, and popular cyclical stocks. This means that the S&P 500 index may be more likely to trade sideways or even trend downwards in the remaining time of this year.

According to statistics, the S&P 500 index excluding market cap bias ($Invesco Exchange Traded Fd Tr S&P 500 Equal Weight Etf (RSP.US)$) has just achieved the best two-week performance relative to the S&P 500 index measured by market value weight since 2020. Currently, the ETFs tracking the S&P 500 index on the market are all anchored to the market value-weighted S&P 500 index. This is a significant shift for the equal-weighted S&P 500 index, which has lagged behind the market-weighted version for months. At the same time, the optimistic sentiment towards the final monetary easing policy is driving investors away from the seven big technology giants that have long been seen as a "safe haven".

Looking at the US stock market as a whole, the core logic for the seven major technology giants in outperforming value stocks and widely held small-cap stocks since 2023 is the global AI boom and the fluctuating and occasionally receding expectations for Fed rate cuts. The trend of the US economic growth is not too strong nor weak enough to fall into economic recession. Under such trading circumstances, the seven major technology giants, with their unparalleled revenue-generating capabilities, unshakable fundamentals, incredibly strong free cash flow reserves, and expanding share buybacks, have become a 'safe haven' for global funds in the face of fluctuating expectations for rate cuts and slowing economic growth.

"All this is because the bench lineup in the stock market has finally come out." Todd Sohn, Managing Director of ETF and Technical Strategy at Strategas Securities, said. "Although all the top players from NVIDIA to Microsoft have paused their upward momentum, other members of the team remain true to their commitments, and under-valued companies have also seized the opportunity for an upward trend."

focusing on technology large-cap stocks, the S&P 500 index and$NASDAQ 100 Index (.NDX.US)$small-cap stocks that have suffered long-term damage can continue to perform well, whether the Magnificent 7 can rebound in time, and how the U.S. stock market will perform when the Federal Reserve finally announces an interest rate cut.

Historical data shows that a rate cut by the Federal Reserve does bring strong stock market returns, but this only applies to cycles not caused by economic recession. Perhaps this round of comprehensive rotation will be based on economic growth cycles rather than recession cycles. Loose monetary policy often stimulates stocks sensitive to interest rates such as utilities, essential consumer goods, and biotechnology, causing them to rebound significantly.

In the first half of this year, as the S&P 500 index repeatedly hit historical highs, some investment institutions on Wall Street began to worry that this bull market in US stocks, which is participated only by a small number of technology companies other than the tech giants, was coming to an end. However, with the market style switching to mid-cap stocks, they began to believe that a new bull market under the "comprehensive rotation" will begin.

To understand how heavy the S&P 500 index is, consider this data: Since the 21-month bull market of US stocks began, the S&P 500 index has risen by about 54%, while the equal-weighted version of the S&P 500 index has risen by only 30%. Data compiled by institutions shows that in the previous four bull market cycles of US stocks, when they reached this stage of 21 months, on average, the equal-weighted S&P 500 index exceeded the market-cap-weighted index by 15 percentage points.

The S&P 500 index has been rising strongly in recent months, with 28 out of 38 weeks since hitting a recent low at the end of October showing an increase. Fund managers have begun to increase their allocations to sectors outside of technology. Data compiled by EPFR Global and Bank of America shows that the inflow of funds to small-cap stocks reached $9.9 billion last week, the second-highest on record.

If the top seven tech giants rebound together, the S&P 500 index is expected to continue its momentum of hitting new highs.

Well-known stock strategist Jim Paulsen correctly predicted the strong rebound in the neglected mid-cap corner of the market before this month, predicting that companies outside of technology will support the next stage of the US stock bull market.

"In history, it is rare to eliminate what many people believe to be a bubble while not causing a larger scale sell-off. The key question is whether large-cap technology stocks can have a healthy pullback, slightly reduce their concentration, and not cause a crash in the S&P 500 index."

Whether this trend will continue is anyone's guess, but some technical indicators look a bit tense. Last week, the S&P 500 index was 15% higher than its 200-day moving average. Data compiled by Andrew Thrasher, a technical analyst and portfolio manager for the Financial Enhancement Group, shows that this gap has appeared before the index fell in 2011, 2015, and 2018.

The S&P 500 index just ended its best performing two weeks in a year in early July and is now approaching the most challenging period in August and September (when the US stock market tends to be relatively sluggish).

For the top seven technology giants, the most heavyweight catalyst is undoubtedly the upcoming earnings reports this month. If the actual performance is very strong, it may cause global funds to flow back into the top seven technology giants and continue to push the S&P 500 index to hit historical highs in the second half of the year. The US government will release the preliminary GDP data for the second quarter on Thursday, and the inflation index favored by the Federal Reserve, core PCE, will be released on Friday. These may help us understand the interest rate prospects and potential trends of the S&P 500 index.

The market generally expects that US economic growth will remain strong. The GDPNow model prepared by the Atlanta Federal Reserve predicts that the annualized quarterly growth rate of US real GDP in the second quarter will rise from 1.4% in the first quarter to 2.7%.

Julie Biel, investment portfolio manager for Kayne Anderson Rudnick, said: "Investors will not tolerate their companies' struggling profit growth for more than a quarter. However, as long as there are any signs of changes in market rotation, fund managers will chase it, because if they chase the market trend early, it will have far-reaching benefits for their investment portfolio performance."

UBS, the international investment bank, has once again raised its target point for the S&P 500 index. The institution now expects the index to close at 5,900 points this year, up from last week's 5,505 points. The institution has also set a bullish target of up to 6,500 points by the end of this year, indicating a potential 18% upside for the bull market.

It is worth noting that UBS initially set the year-end target for the S&P 500 index at only 4,850 points. But with the global AI boom driving the index to constantly break records, UBS has raised the target for the S&P 500 index four times this year: to 5,150 points, 5,400 points, 5,600 points in January, February, and May respectively, and now 5,900 points.

UBS' American stock market investment strategy team stated in its latest report: "We believe that the background of the US stock market remains favorable due to the steady and expanding profit growth, slowing inflation, and Fed's shift towards interest rate cuts. In addition, under the AI boom, global enterprises have significantly increased their investments in AI infrastructure and application levels, thereby continuing to drive market cap growth for the seven technology giants."

The UBS strategy team emphasized that the upcoming second-quarter earnings of the seven technology giants are crucial to the S&P 500 index, and the institution is bullish on the revenue effects brought by the AI boom, which will continue to drive unexpected growth for Nvidia and the other seven tech giants, thereby driving the S&P 500 index to new highs. The report mentioned that the impact of AI technology on enterprise productivity and profit growth is much greater than expected by investors.

The well-known Wall Street investment firm Wedbush recently stated that Microsoft, Google, Amazon, and Meta and other technology giants are expected to achieve strong second-quarter performance. The company's report released recently states: "In short, our research on global technology companies shows that the deployment of cloud computing and the spending on enterprise AI far exceed Wall Street's expectations, which is a good sign for the tech giants." "We believe that second-quarter earnings will be a key positive catalyst for technology stocks, and we expect US technology stocks to rise by about 15% for the rest of the year after a strong 24% increase in the first half of this year. The broader growth story of AI technology now occupies the center of the stage."

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