A blistering rally in U.S. big tech stocks may be due for a breather, offering hope for market segments that have been more tepid this year.
Many investors believe the long-term case for tech stocks is solid, given their strong earnings and excitement over the revolutionary potential of artificial intelligence. But huge price gains, including Nvidia Corp's (NVDA.O) 155% year-to-date run, have stirred worries that the tech rally might be overheated.
Market laggards such as small caps and so-called value stocks such financials and industrials may be looking like bargains.
"Nvidia has been a rocket ship, and when things go up this quickly you don't want to be the last one through the exit door," said Michael Purves, CEO of Tallbacken Capital Advisors. "People want to be invested in this equity rally, and if they sell Nvidia the most likely places they are going to go is value and cyclical stocks."
A rotation out of big tech could allay concerns of concentration that have arisen in recent weeks, as the market rally has once again narrowed to a handful of names. About 60% of the S&P 500's total return of more than 14% for the year has been driven by five companies whose shares have some of the heaviest weightings in the index: Nvidia, Microsoft (MSFT.O), Meta Platforms (META.O), Alphabet (GOOGL.O), and Amazon.com (AMZN.O), data from S&P Dow Jones Indices showed.
Some signs of big tech exhaustion emerged in the past week. Nvidia shares are down 10% from their peak reached on Thursday, taking the chipmaker out of its short-lived position as the world's most valuable company. Nvidia is on track for a 4% decline for the week, while the S&P 500 is on track for a less than 1% gain.
Closely watched economic data in the week ahead, including inflation data on Friday, could also affect investor positioning, as market participants gauge whether a nascent slowdown in inflation is continuing.
Tech appears over-extended based on several barometers, Purves noted. The Relative Strength Indicator of the Mag6 Index, which measures the speed and magnitude of price changes in the stock market's six biggest stocks, is at the highest it has ever been, he said.
Meanwhile, the price ratio between the Nasdaq 100 (.NDX) and the S&P 500 Equal Weight Index (.EWGSPC) - a proxy for the average stock - has jumped 9% since the beginning of June, he said. The S&P 500, by contrast, is up nearly 4% this month.
Optimism is high among retail and institutional investors, which some view as a contrarian indicator because it means the bar for positive surprises is elevated. The AAII Sentiment Survey was steady at 44% in the week ended June 19, about 8 percentage points above its historical average. Sentiment among fund managers in the latest survey by BofA Global Research was at its highest level since late 2021, with investors trimming cash positions and increasing equity allocations.
The 13% month-to-date gain in the VanEck Semiconductor ETF (SMH.O) is a sign that AI-fever might have gone too far, said Larry Tentarelli, chief technical strategist at Blue Chip Daily Trend Report.
"In the near-term you could get a pullback in tech and semis, and a healthy rotation into other parts of the market that would keep this bull market going."
Even if a pullback does occur, there are few signs investors would leave tech and growth stocks for long. Betting against tech has been a losing proposition over the last decade, as the Nasdaq 100 index has advanced more than 400% while the Russell 1000 Value (.RLV) is up about 70% over the same time.
The Russell Value index is up 5.6% this year. Investors have given an even chillier reception to small cap stocks, with the Russell 1000 (.RUT) down 0.5% year-to-date.
Tech could rebound fairly quickly as investors rush to buy the dip. The Nasdaq 100 took five weeks to reach a new high after falling as much as 9% in April.
"I don't get the sense that investors are looking to ring the register on this and book gains," said Jason Alonzo, portfolio manager at Harbor Capital Advisors. "If anything, I'm seeing people who feel that they missed it trying to get in on this trend."
