$1.3 Trillion Rotation Leaves Gap for New Market Leadership
Now that funds are finally flowing out of Big Tech, investors will want to decipher where they are headed next.
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The recent rotation out of Big Tech has been something to behold. Over the past seven trading sessions, the Magnificent Seven has fallen nearly 8% overall and bled out some $1.3 trillion of market capitalization collectively. This rotation is most likely to last a bit longer in my opinion, given the extended valuation of this group. For example, even after its recent pull back, Apple AAPL still trades approximately 75% over its average valuation over the past decade based on its price-to-sales ratio.
Early on, funds flowing out of the likes of Microsoft MSFT found their way into small caps and other laggards of the market. However, over the past few trading sessions, that seemed to stop and the Russell 2000 ended the week approximately 3.5% lower than its highpoint earlier in the week. That said, the small cap index did post a gain of 1.7% last week while the NASDAQ fell 3.6%. The question for investors is where this sector rotation will go next.
I would love to see flows continue into small- and mid-cap stocks as that is where most of my covered call holdings are positioned around. That would make some sense, as the Russell 2000 is trading almost exactly where it started 2021 at and should have a lot of "catching up" to do. Unfortunately, small businesses are still struggling with inflation, higher interest rates and tepid consumer demand in many cases among myriad other headwinds. Overall, corporate profits were down nearly 4% year-over-year in the first quarter.
Home builders and housing related stocks have got a bid as the chances of a cut to the Fed funds rate at the September FOMC meeting have become a near certainty. I would probably fade that rally. Average mortgage rates moving to 6.5% or even 6% will only help historically-low housing affordability on the margins. Somewhat lower rates will also do little to get more folks willing to sell their current abode with its 3% mortgage rate.
I would love to see biotech emerge as a new leader. Biotech has had a decent year with the SPDR S&P Biotech ETF XBI up just over 9% here in 2024. The GLP-1 space has exploded with huge sales gains from the likes of Zepbound and Wegovy, not to mention myriad potential entrants developing new weight loss candidates. Eli Lilly and Company LLY and Novo Nordisk A/S NVO currently dominate this huge and growing market and these equities have seen huge rallies. However, their stocks have seen some profit taking lately and their valuations still seem stretched. For biotech to move meaningfully higher, we are probably going to have to see a notable uptick in M&A activity across the industry.
I could make a case for the energy sector, given that myriad geopolitical risks and crude oil prices have moved up some 10% over the past month. Energy is one of few areas of the market where I am overweight. It is hard to make a case for consumer stocks, given that personal saving rates are near historical lows, credit card debt is at record highs and the jobs market is starting to weaken. Well-known names like Home Depot HD, McDonalds MCD, Starbucks SBUX and others have warned in recent months about tepid consumer demand.
I will be watching closely over the next few weeks to see if new leadership emerges in the market, absent of which we may just see an overall market swoon much as we did last summer starting in August.
At the time of publication, Jensen was long XBI.
