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A trading week that ended with a thud also marked a turning point.
Markets this week showed signs that the next leg upward won’t require Big Tech to lead the way.
Muscular corporate results and outlooks from a broadened set of sectors have powered lofty expectations. Projected returns for the next year are driving the growth story, and the latest Fed rate cut has further emboldened a move into cyclical names.
“The first eight months of the year the market was dominated by momentum and AI plays; since then, the market has shifted as valuations, sustainability around margins, and debt controversy developed around the technology sector,” said Eric Teal, chief investment officer for Comerica Wealth Management, in a note on Thursday.
But weakened tech enthusiasm leaves space for investor sentiment and returns to improve.
And from the perspective of Wall Street bulls, the more muted mood reflects a moment for the market to catch its breath, and suggests there’s room for investors to continue the rally.
The rotation has arrived with a fresh dose of AI anxiety, which analysts have said is a necessary part of the market movement, but that’s also a little unnerving.
Gargantuan spending and uncertain returns have hung over the AI trade for more than a year. But bouts of uncertainty have become more frequent and persistent. Stock dives from Oracle (ORCL) and Broadcom (AVGO) animated the fresh pessimism with painful enthusiasm. And part of the turn away from Big Tech stocks is a rekindling of AI concerns that even its top players have never really resolved.
Read more: How to protect your portfolio from an AI bubble
Ballooning, and some investors would say strained, multiples gave high-flying names little room for error.
But some weakness in the AI trade could spur other sectors to rise. As Thomas Shipp, head of equity research for LPL Financial, said in a note earlier this week, an increase in volatility and a retreat from the AI theme may be required for value stocks to outperform next year.
The broadening out will also be spurred on by an accommodating Fed, and a long period of small caps lagging behind their larger siblings, said Teal. The Russell 2000 (^RUT), for instance, hit a record high this week.
As Teal said, “We foresee this rotation in the early stages with relative valuations remaining attractive.”
