While the small-cap rally cooled off towards the end of last week, the theme of rotation away from the magnificent 7 stocks remains intact. Other non-tech strategies, including value, dividends and low volatility, haven’t done quite as well as small-caps over the past week or two, but they do show a very defined trend away from the group of stocks that have been carrying the market higher for the past 18 months.
Is this rotation sustainable? As I laid out earlier in the week, there’s a case for and there’s a case against. There’s evidence for and there’s evidence against. If the economy keeps moving in the direction that the current trends suggest it is, then I think the value & defensive equity trade could have some legs. I still think there’s a chance that this move is a fake-out. The initial reaction may have been negative for mega-cap tech, but I can also see an outcome where investors return to the “safety” of this group because it’s just what they’ve done for nearly two years. Old habits are hard to break. Once the initial fear wears off, we could see a reversion back to tech and away from the current leaders.
The one thing that gives me at least a little conviction in this idea is the fact that Treasuries are not really moving. Long bond yields are still well off of their 2024 highs, but you’d expect to see bonds rallying if the S&P 500 is losing ground. That hasn’t happened and the fact that market breadth has improved may be the reason. For the most part, trading has been pretty orderly and this looks more like a rotation from one area of the U.S. equity markets to another, not a flight to safety.
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