As the "stock market sell-off" in the summer gradually recedes, the US stock market has recovered most of its losses. The other 493 component stocks of the S&P 500 index, excluding the "magnificent 7" technology giants, have shown their resilience in the market turmoil and successfully driven the recovery of the S&P 500 index.
From real estate to utilities, and then to essential consumer goods, the stocks of these traditional industries are becoming the new darlings of the market.
Is the era of the "magnificent 7" coming to an end?
In the past two years, NVIDIA, Microsoft, and other technology giants have been the main driving force behind the stock market rally, thanks to strong profit growth and extensive deployment in the field of artificial intelligence, which has attracted investors' attention.
However, with concerns about the slowing economic growth and the imminent start of an interest rate cut cycle by the Federal Reserve, investors are starting to shift their focus to industries such as real estate, utilities, and essential consumer goods.
Since the S&P 500 index reached its peak on July 16, the so-called "big 7 tech stocks" - NVIDIA, Microsoft, Apple, Google, Amazon, Meta Platforms, and Tesla - have mostly underperformed, with Bloomberg's Big 7 Tech Stock Index falling by 5.3%.
During the same period, the S&P 500 index has fallen by less than 1%, mainly dragged down by the larger-weighted technology stocks, while the rise of other companies outside the "magnificent 7" has offset most of the losses.
The rise of the "S&P 493"
In this context, those usually inactive industries have performed well, with real estate and utilities both rising by 11% since July 16.
Michael Caspe, a stock strategist at Bloomberg Intelligence, said,
"Investors like to focus on companies that have turned their profits from decline to growth. This has, to some extent, led them away from technology stocks and towards 493 stocks that were once abandoned."
Analysis suggests that it is the market's expectation of loose monetary policy that has fueled this shift. Currently, concerns about the profitability of technology giants' massive spending on AI computing devices, especially since there is little evidence so far that these expenses will generate enough revenue growth, have prompted investors to turn to other industries with improved profit prospects.
For example, after seven consecutive quarters of declining profits, the healthcare industry saw a 16% profit growth in the second quarter. Analysis predicts that this growth will continue until the end of this year, with a projected profit growth of 45% in the first quarter of 2025.
Still bullish on technology stocks.
Nevertheless, some analysts believe that whether this market rotation is just a short-term phenomenon or a long-term trend may depend on the direction of the economy. The policy direction of the Federal Reserve this week will provide important clues to the market, as there is still disagreement among traders about whether the central bank will cut interest rates by 25 basis points or 50 basis points.
Adam Grossman, Chief Investment Officer of Riverfront Investment Group's global equities, believes that the stocks that will "start to show leadership" are the cyclical stocks that will benefit from higher economic growth and lower interest rates. However, large-cap technology stocks still make up the largest allocation in their portfolio.
Keith Lerner, Co-Chief Investment Officer at Truist Advisory Services, believes that if there is uncertainty, investors may continue to pay a premium for growth prospects. Defensive industries will continue to perform well if the economy continues to slow down. However, technology stocks will perform well in both slowing and stable environments.
Data shows that the earnings of tech giants remain strong, but the growth rate has slowed compared to the past few years. The rapid growth at that time was due to stable sales growth and a focus on efficiency, which led to hundreds of thousands of job cuts in the entire industry.
The profit growth of the 'Magnificent 7' tech stocks in the second quarter increased by 36%, a decrease from over 50% in the previous three quarters. According to Bloomberg Intelligence data, profit growth in the next four quarters is expected to be between 17% and 20%.
Although the sluggish economy has reduced the price-to-earnings ratio of many tech stocks, they still remain relatively high compared to the average of the past decade. For example, microsoft's pe ratio is 32 times, down from the peak of 35 times in July, but still much higher than the average of 25 times over the past decade.
Michael Mullaney, Global Market Research Director at Boston Partners, also believes that even though the prosperity of stocks related to ai like nvidia has sparked comparisons to the dot-com bubble period, it does not mean that tech stocks will not continue to perform well:
"Lower valuations of the other 493 companies may attract some buyers, but this does not mean that investors should completely abandon tech stocks. These companies are making a lot of money, which is very different from the situation in 2000."
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