The sharp pullback by megacap tech stocks, which had been the primary drivers of a robust 2024 rally, caused significant declines in the S&P 500 and the Nasdaq on Wednesday. However, market strategists maintain that patient market bulls should be able to endure this temporary downturn. Art Hogan, chief market strategist at B. Riley Wealth, explained that there has been a five-day rotation out of tech and consumer services into other sectors. On Wednesday, this rotation intensified with selling focused on the so-called “Magnificent Seven” tech stocks, but these funds did not find a home in the other 493 stocks in the S&P 500 or in small-cap stocks.
Hogan considers this rotation a healthy adjustment after a significant rise in the small-cap Russell 2000 index, which posted an 11% return over five days, leaving it technically overbought. On Wednesday, the small-cap index gave back 1.1%. Investor confidence is growing that the Federal Reserve may start cutting rates later this year due to resilient economic data, which should support the continuation of this rotation. As investor confidence in the foundations of a cyclical rally grows, the stock-market rally is expected to broaden out.
Nvidia Corp., a primary beneficiary of the artificial-intelligence-driven rally, saw a 6.6% drop, alongside other semiconductor stocks. This decline was fueled by fears of heightened trade restrictions, regardless of the outcome of the upcoming presidential election. This added to the broader tech stock selloff that began last week after cooler-than-expected June inflation data. The tech-heavy Nasdaq Composite slumped 2.8% on Wednesday, while the S&P 500 slid 1.4%. Conversely, the more cyclically oriented Dow Jones Industrial Average rose by 0.6%, reaching a record finish.
This divergence in stock performance is notable. The last time the Dow Jones Industrial Average rose on the same day the S&P 500 fell by more than 1% was April 14, 1999, according to Dow Jones Market Data. This rare occurrence underscores the mirror-image rotation occurring in the stock market, despite Wall Street professionals placing little emphasis on the Dow. Steven Sosnick, chief strategist at Interactive Brokers, highlighted in a Wednesday note that he prefers not to focus on the Dow due to its narrow, curated, and price-weighted composition of 30 stocks. However, it is notable that 23 of the 30 Dow stocks were higher on Wednesday, with only two of the “Magnificent Seven”—Apple and Microsoft—among the decliners.
The other members of the “Magnificent Seven” tech stocks are Alphabet, Amazon, Meta Platforms, Nvidia, and Tesla. The recent selloff has erased $1.1 trillion from the market cap of these tech giants over five days. Sosnick observed that the tech stocks getting hit hardest are the ones that have driven most of this year’s stock market gains. Despite the recent declines, the Nasdaq remains up nearly 20% in 2024, and the S&P 500 has rallied more than 17%, while the Russell 2000 has gained 10.5%, even after last week’s catch-up round. The Dow has gained 9.3% in 2024.
Investors should be able to withstand a few down days in these megacap tech names, Sosnick noted, adding that it might even be somewhat beneficial if the selling reduces the sky-high expectations priced into these stocks as earnings season looms. The key in the coming days will be whether dip buyers step in to stabilize these stocks and whether money continues to flow into other sectors. If this happens, there should be no problem. However, continued selling in major tech names could signal more significant issues, whether due to a simple reversal in momentum or deeper concerns.
Sosnick pointed out that a rise in the Cboe Volatility Index (VIX), a measure of anticipated S&P 500 volatility over the coming 30 days, could reflect rising nervousness along these lines. The VIX, often referred to as the “fear gauge,” is closely watched as an indicator of market anxiety. If it increases significantly, it could indicate that investors are becoming more worried about the potential for further declines in the stock market.