Written by David Randall
In the current market scenario, a broadening rally in U.S. stocks is providing a positive signal to investors concerned about the concentration in technology shares. This trend comes as the markets anticipate crucial jobs data and the Federal Reserve’s expected rate cuts in September.
While tech giants like Nvidia and Apple have been driving the market’s performance, investors are also diversifying their portfolios by investing in undervalued value stocks and small-cap companies. These sectors are anticipated to benefit from lower interest rates, with the Fed likely to initiate a rate-cutting cycle at its upcoming monetary policy meeting.
The recent shift towards a more diverse market rally, which gained momentum last month but faced setbacks during an early August sell-off, is viewed positively by many investors. The dominance of large tech companies like Nvidia has contributed significantly to the S&P 500’s year-to-date gain of 18.4%.
Liz Ann Sonders, chief investment officer at Charles Schwab, commented, “No matter how you slice and dice it, you have seen a pretty meaningful broadening out, and I think that has legs.”
Value stocks, characterized by companies trading at a discount based on metrics like book value or price-to-earnings ratio, include sectors such as financials and industrials. Some investors believe that the rallies in these sectors and small caps could continue to thrive if the Fed implements rate cuts while the economy remains strong.
Recent data from Charles Schwab indicates that 61% of stocks in the S&P 500 have outperformed the index in the past month, a significant increase from the 14% outperformance observed over the past year.
Additionally, the performance of the so-called Magnificent Seven tech giants has lagged behind other stocks in the S&P 500 since mid-July, suggesting a shift in investor sentiment away from tech-heavy investments.
Despite some tech companies falling short of investor expectations, the market has remained resilient. The equal-weight index, representing the average stock performance, hit a new high this week and is up around 10.5% year-to-date, narrowing the gap with the S&P 500.
Analysts at Ned David Research noted, “When market breadth is improving, the message is that an increasing number of stocks are rallying on expectations that economic conditions will support earnings growth and profitability.”
Notable value stocks that have performed well this year include General Electric and Targa Resources, both showing significant gains. The small-cap index has also rebounded from its recent lows, indicating positive sentiment in the market.
Looking ahead, the upcoming non-farm payrolls report could further support a broader market rally if it reflects a steady, yet manageable, cooling of the labor market, according to David Lefkowitz, head of U.S. Equities for UBS Global Wealth Management.
While investors are unlikely to abandon tech stocks, opportunities to purchase them at lower prices during periods of volatility may be attractive, as noted by Jason Alonzo, a portfolio manager with Harbor Capital.
According to LSEG data, technology stocks are expected to outperform the market in terms of earnings growth through 2025, with third-quarter earnings projected at 15.3% compared to 7.5% for the S&P 500 as a whole.
Alonzo emphasized, “People will sometimes take a deep breath after a nice run and look at other opportunities, but technology is still the clearest driver of growth, particularly the AI theme which is innocent until proven guilty.”