The 'great rotation'?

Underwhelming earnings reports from leading tech giants Tesla and Alphabet sparked a sell-off in US equities on Wednesday, July 24. 

The blue-chip S&P 500 slumped 2.3% while the Nasdaq Composite tumbled 3.6%, with both indices logging their worst days since 2022 (per the Financial Times, July 24, 2024). In results released on Tuesday, July 23, Tesla recorded its second-straight decline in quarterly profits, leading its shares to collapse 12.3% on Wednesday on the back of slowing sales growth, amid increasing competition in the electric vehicle (EV) sector. 

Alphabet – which owns Google – saw its shares sink 5% on Wednesday as the company’s advertising revenue failed to meet expectations. 

The so-called “Magnificent Seven” – Microsoft, Apple, Tesla, Amazon, Meta, Alphabet and Nvidia – have all traded lower in recent weeks, adding to investor concerns about the ability of a handful of mega-caps to continue to drive the stock market rally. 

“With better inflation data and near-100% presumptions of a September rate cut by the US Federal Reserve, we’re finally seeing serious broadening of the market, as investors rotate out of mega-cap tech and into unloved value and small caps,” says Linda Duessel, Senior Equity Strategist at Federated Hermes.

Microsoft was embroiled in a global technology outage last week, sparking chaos around the world, which may have encouraged the tech sell-off. Meanwhile, the possibility that Donald Trump could triumph in November’s presidential election and impose sweeping trade tariffs may also have boosted smaller domestically focused US companies. The US small cap Russell 2000 has risen more than 10% since the start of July (per Bloomberg as of July 25, 2024).

The US presidential race took another twist this week as President Joe Biden dropped out of the contest, leaving Vice President Kamala Harris as the likely Democratic nominee. 

“Investors should keep in mind that whilst politics can cause volatility, this is often short term and importantly, the economy trumps politics,” says Charlotte Daughtrey, ​​​​Equity Investment Specialist at Federated Hermes Limited.

“Since the administration of Herbert Hoover (1929-1933), the S&P 500 has delivered an average of 6.2% annualised return in every election year. The small-cap Russell 2500 Index doesn’t have data going back to the 1930s, but since its inception in 2003, it has outperformed the S&P 500 in every election year,” she points out. 

“Ultimately both candidates want a strong economy, and this will benefit US small- and mid-cap companies which are the economic backbone of the country.”