Stock market turnaround fuels recovery after summer sell-off
The stock market has recovered most of its losses from the summer sell-off. While the S&P 500 has rallied before, this one is unique because it wasn’t led by Big Tech—instead, it was everyone else’s turn.
Tech giants like Nvidia Group and Microsoft Corp. has led the rally in the stock benchmark for much of the past two years, with investors drawn by its explosive profits and exposure to artificial intelligence. But now traders are turning to sectors such as real estate, utilities and consumer staples amid concerns about slowing economic growth and as the Federal Reserve prepares to start cutting interest rates as early as Wednesday.
Since the S&P 500 peaked on July 16, the so-called Magnificent Seven tech stocks — Nvidia, Microsoft, Apple LLC, Alphabet LLC, Amazon.com LLC, Meta Platform Inc. and Tesla Inc. — mostly fell, with the Bloomberg Magnificent 7 Index down 5.3%. While the broader stock benchmark fell less than 1% during that time, largely because the S&P overvalued these fast-growing tech companies, typically depressed sectors led the index with big gains, with both real estate and utilities up 11%.
Those numbers include last week’s S&P 500 rally, led by the tech sector.
“Investors like to look at companies that are moving from declining earnings to growing earnings,” Michael Casper, an equity strategist at Bloomberg Intelligence, said in an interview. “That’s driving them away from tech and into the other 493 stocks that have been eliminated.”
Check for degradation
The turnaround is supported by expectations of easing monetary policy. But it is also a testament to the improving earnings outlook for the rest of the market at a time when big spending by tech giants is raising concerns about their profit margins.
Whether it’s a minor blip or a longer-term trend, however, will likely depend on the path the economy takes. Markets will get a big clue on that from the Fed this week, with traders split on whether the central bank will cut rates by a quarter point or a half point.
“We don’t believe we’re in a recession and the stocks that are starting to show leadership are cyclical stocks that will benefit from higher economic growth and lower interest rates,” said Adam Grossman, global equity investment director at Riverfront Investment Group, adding that large-cap tech stocks remain his firm’s largest position.
An economic downturn can benefit defensive sectors, but it also tends to be a good environment for tech stocks, according to Keith Lerner, co-chief investment officer at Truist Advisory Services.
“If there is any uncertainty, our view is that investors will continue to pay a premium for the growth outlook,” Lerner said in an interview. “If things continue to slow down, defensives will continue to do well. In any environment, slow down or steady, I think tech will do well.”
Another factor helping non-tech sectors is improved earnings prospects. Take health care: After seven straight quarters of declining profits, earnings from health care companies rose 16% in the second quarter, according to data compiled by Bloomberg Intelligence. That expansion is expected to continue through the rest of the year, with earnings growth expected to reach 45% in the first quarter of 2025.
Technology slows down
Of course, the tech giants’ earnings are still strong. They’re just not growing as fast as they have in recent years, driven by steady sales growth and a focus on efficiency. result in hundreds of thousands of job cuts across the industry.
The Magnificent Seven companies posted 36% earnings growth in the second quarter. That’s impressive, but down from the more than 50% growth seen in the previous three quarters. And earnings are expected to grow between 17% and 20% over the next four quarters, according to BI data.
Part of last month’s sell-off in Big Tech stocks was related to companies spending heavily on equipment for AI computing. Last quarter, Amazon, Alphabet, Microsoft and Meta Platforms poured a combined more than $50 billion into capital spending.
One big beneficiary of all that cash flying around is Nvidia, whose semiconductors have become prized for the kind of computing power needed to power AI models. But more broadly, it’s also raised concerns among investors about profit margins at the chipmaker’s biggest customers — especially since there’s been little sign so far that the spending is translating into the kind of revenue growth needed to justify it.
While the recession has slashed multiples for many tech stocks, they remain high. Microsoft, for example, is valued at 32 times its expected earnings over the next 12 months, down from a peak of 35 in July but well above its average of 25 over the past decade.
Cheaper valuations in other areas of the market are likely to continue to attract investors. But that doesn’t mean tech won’t continue to do well, even though the boom in AI-related stocks like Nvidia has drawn comparisons to the dot-com bubble, according to Michael Mullaney, director of global market research at Boston Partners.
“The remaining 493, which are much cheaper, will probably be auctioned off a little bit, but that doesn’t mean you throw the baby out with the bathwater,” he said. “These companies are printing money a lot. That’s a big difference from 2000.”
