While we are getting a tech rally Wednesday thanks to Advanced Micro Devices (up 7%), this is the month when rotation became more than a one-day event. We are going into the last day of the month with the S & P 500 little changed in July, but everything else further down the market capitalization scale is having a fine summer: Major indexes in July S & P 500: +0.7% S & P 500 Equal Weight +4.8% Russell 2000 +10% S & P Midcap +5.5% Within the S & P 500, the dispersion among sectors is unusually large, with technology lagging and everything from defensive to cyclicals to commodities all higher. S & P 500 sectors in July Banks +16.1% Real estate + 6.9% Utilities + 6.1% Industrials + 4.8% Materials + 4.2% Health care + 2.6% Consumer staples + 2.0% Energy + 2.0% Technology – 3.3% Communication services – 4.6% Semiconductor ETF (SMH) – 7.0% When you have sectors such as banks, energy, health care and consumer staples up, that usually would signal a strong month for value, and that is indeed what has happened: Growth vs. Value in July S & P 500 Value + 4.8% S & P 500 Growth – 2.3% Why is this happening? Since small-cap companies often have more debt and higher borrowing costs, the expectation of lower rates is certainly a factor. But valuation plays a part as well. Large-cap stocks, particularly tech, have grown their valuations much faster. I noted weeks ago that more fundamentally inclined investors were worried about the slower rate of earnings growth for big-cap technology stocks . The Russell 2000 would also benefit any time a rotation out of tech occurs because the weightings are different. While the two sectors that comprise technology in the S & P 500 — technology and communication services — are about 40% of the S & P 500, the Russell 2000 is much more diverse. Russell 2000: Sector weightings Industrials 18.8% Health care 15.0% Financials 15.0% Technology 14.0% Consumer discretionary 12.7% Energy 7.8% Real estate 5.8% Other 11.0% Source: FTSE/Russell That means when a true rotation occurs in an environment where rates are expected to decline, small caps can be a beneficiary.
July brought a great stock market rotation. Here’s why it is happening
Jul 31, 2024
