Has the Long-Awaited Rotation to Neglected Stocks Begun?

The stock market may finally be rotating to sectors that have been neglected during the long, spectacular mega-cap era. During these years of exceptional growth in mega-cap tech stocks, their growth was so powerful that it carried the broader indices – without the largest stocks, the indices would have turned in negative performance.  

Market participants have long awaited a return to enthusiasm and attention to the rest of the companies making up the major indexes. The wait may be over, as there was a noticeable rotation in strength last week. The mega-cap darlings declined while the rest of the broader market advanced.  

A Shift in Market Dynamics

According to Goldman Sachs (GS), a staggering 87% of S&P 500 (SPX) stocks outperformed the index last week. The markets have reason to celebrate this as it is the record’s highest percentage. Moreover, it followed a record-breaking six-month stretch when the fewest stocks outperformed the S&P 500, which was carried by a handful of giants.  

Goldman isn’t the only respected firm mentioning that areas of market strength have now shifted. Strategas Research, a firm known for its no-nonsense data analysis, reported on a related statistical shift last week. Strategas points out that on Thursday, when the S&P 500 dipped slightly, the index turned in the highest-ever ratio of stocks, which went up compared to those that went down. This means that while the overall market was down a little, a much higher percentage of individual stocks increased in value. Analysts refer to this as the Advance Decline Ratio.  

Small Caps Roaring 

The most dramatic shift in stocks was to smaller companies. Last week, investors drove up the Russell 2000 (IWM), which tracks small-cap stocks, by a staggering 5.5%. This is a big deal because, for a long time, tech stocks have been the clear favorites, yet the Nasdaq 100, an index heavily weighted towards big tech companies, actually fell over 1% during the week. 

Analysts at Renaissance Macro had a warning. They pointed out that this kind of surge in small caps has only happened a few other times in history, and all three of those previous times came right before significant market downturns.  

Rotation from Tech Giants to Neglected Sectors

These unprecedented aberrations, in which more stocks are up than down, yet the market index is still negative, are made possible by the extreme concentration of market value in a handful of large-cap stocks.  

If this rotation continues, the reason can be traced back to an increased expectation of a Fed interest rate cut. Markets presume that this would lead to broader profit growth and a long-awaited broadening of sector participation in growth. Algorithmic trading strategies, fueled by momentum, may even amplify any rotations.  

The market shift now has investors moving away from tech giants, which have dominated the market for years. The rotation has led to a surge in small-cap stocks, which have been long neglected. This change is significant, reflecting a broader economic recovery and a shift in investor focus towards sectors with growth potential. 

Key Takeaway

The market rotation in 2024 represents a significant shift in investors’ sentiment and strategy. As the economic conditions evolve, investors look beyond the tech giants and explore opportunities in neglected sectors. This could increase the importance of individual investors focusing on sectors beyond tech and perhaps even individual stock selection.