Over the past week, US value stocks and small-cap stocks have soared, but the “Big Seven” have struggled. Market shifts and rotation have begun?

Since this year, boosted by AI and expectations of interest rate cuts, the S&P 500 index has entered a bull market, and the “Big Seven” (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta), which account for more than 20% of their weight, have become the “backbone” of the sharp rise in US stocks. Had it not been for the “Big Seven,” the S&P 500 would probably have risen by only 8% instead of 19% today.

Recently, however, the trend has begun to change, and the performance of the US stock “Seven Sisters” fell out of favor, showing net sales in 15 of the past 17 trading days. In contrast, small-cap stocks and value stocks are favored, and small-cap stocks have a clear “scale premium.”

As markets bet on a recession and the Federal Reserve will cut interest rates rapidly, will small-cap stocks and value stocks shine? How long can the strength of the US stock market “Seven Sisters” hold on?

Are the seven US stock sisters losing momentum?

Goldman Sachs trader Michael Washington pointed out in his latest market review that the “Seven Sisters” is falling out of favor. It has been sold off for 15 days in the past 17 days, and long traders and hedge funds have recently been in a net sell-out state.

The overnight trend reflects a recent adjustment in the overall trend. The performance of the Nasdaq 100 (tracking technology stocks) surpassed the Russell 2000 Index (tracking small cap stocks), mainly affected by Apple's surge. After the weakening of large-cap stocks yesterday, there was some demand for passive long trading. At the same time, the “Big Seven” are also actively buying back.

However, although the “Seven Sisters” had some moderate buying, aggressive sales have continued recently. The overall execution traffic bias of Goldman Sachs transactions was -263 bps, while the 30-day average was -78 bps. The selling biases of long traders and hedge funds were -8% and -2.8%, respectively.

Market participants have begun to shift their focus from the Big Seven to other stocks. The performance of these seven large technology stocks has fallen far short of the market in the past two weeks. Although there was some moderate easing yesterday, Goldman Sachs pointed out:

Hedge funds have actively reduced their positions in technology stocks with very large market capitalization. Out of the past 17 trading days, 15 have seen net sales, almost entirely driven by long sales.

It is worth noting that up to now this year, the overall cumulative net trading volume of the US stock “Seven Sisters” has remained roughly the same as at the beginning of the year, yet in August it was bought more than 50% in net purchases.

Furthermore, according to the latest data, the share of the US stock “Seven Sisters” in Prime books has dropped to 17.6% from the previous peak level (about 20%), but compared to the performance of the past five years, it is still at a high level, ranking 91st in the ranking.

Are small-cap stocks and value stocks about to shine?

The performance of the “Seven Sisters” of US stocks fell out of favor; on the contrary, small-cap stocks and value stocks were favored.

According to media reports, the analysis points out that recent economic data shows that the US economy is slowing down, which is usually a sign of buying small-cap stocks. Judging from history, in the three economic downturns in the 70s and 80s of the last century, small-cap stocks performed better than the general market.

At the same time, small-cap stocks have a “premium of scale” — that is, in the long run, small-cap stocks often provide additional returns without additional risk. According to this theory, the market underestimates the value of companies that are less well-known and receive less attention. Over the past decade, although the market value of the S&P 500 index is increasingly concentrated on the top tech giants, the performance of small-cap stocks has fallen far short of the market.

A paper in the academic journal SSRN points out that as market concentration increases, the scale premium will also increase. But at the same time, the study also showed that since so much market capitalization is concentrated on these seven stocks, the benefits of investing in small-cap stocks will be greatly reduced when the specific investments of several of these companies are rewarded. Until now, this factor has tended to be weaker than the small-cap effect, but that doesn't mean this will always be the case.

Editor/Somer