Expected US rate cuts drive investors beyond Big Tech

Less-loved areas of market could benefit from easing monetary policy

NEW YORK:

Looming US interest rate cuts are presenting investors with a tough choice: stick with the Big Tech stocks that have driven returns for more than a year or turn to less-loved areas of the market that could benefit from easing monetary policy.

Owning massive tech and growth companies such as Nvidia, Microsoft and Amazon has been a hugely profitable strategy for investors since early 2023, even as the stocks’ market dominance has drawn comparisons to the dot-com bubble of the late 1990s.

That calculus may start to change following Thursday’s surprisingly cool inflation report, which solidified expectations for a near-term rate cut by the Federal Reserve. Lower rates are seen as beneficial to many corners of the market whose performance has lagged this year, including small-caps, real estate and economically sensitive areas such as industrials.

Market action at the end of the week showed a nascent shift may have already begun. The tech-heavy Nasdaq 100 suffered its biggest drop of the year on Thursday while the small-cap Russell 2000 had its best day of 2024. The Nasdaq 100 has gained about 21% this year while the Russell 2000 is up just 6%.

Also on Thursday, the equal-weight S&P 500 – a proxy for the average stock in the benchmark index – had its biggest relative gain since 2020 over the S&P 500, which is more heavily influenced by the largest tech and growth stocks. That chipped away at the huge advantage for the S&P 500, which remains up about 18% in 2024 against a 6.7% gain for the equal-weight index.

“The trade got too one-sided and we’re seeing some reversal of this,” said Walter Todd, Chief Investment Officer at Greenwood Capital.

Small caps and the equal-weight S&P 500 extended their gains on Friday even as tech stocks rebounded.

Investors cautioned that the moves could be a snap-back after the disparity in performance between tech and other market sectors reached extremes. Further, recent periods of market broadening have been short-lived: for example, small caps surged at the end of 2023, when investors believed rate cuts were imminent, only to lag in the following months.