Has the style of the US stock market changed significantly? US inflation is a big positive, the "Seven Sisters" plummet, while small-cap stocks soar
The Nasdaq 100 plummeted by 2.2%, while the small-cap Russell 2000 surged by 3.6%. The divergence in their trends is the largest since January 2021. In fact, there were early signs of Thursday's trend. Goldman Sachs mentioned that previously, US technology stocks continued to rise, but "smart money" hedge funds reduced their positions. Some analysts believe that Thursday's trend will not form a trend, but it highlights the market's search for different trades, not just long positions in large technology stocks
Data released on Thursday showed that inflation in the United States in June cooled significantly beyond expectations, with the overall CPI month-on-month growth rate turning negative for the first time in four years, and the core CPI year-on-year growth rate hitting a new low in over three years. Market expectations for a Fed rate cut this year have significantly increased, with the likelihood of a first rate cut in September rising to 80%, and the probability of a rate cut in July reappearing.
The positive news of US inflation is a major boost, with US stocks rising sharply in pre-market trading. The three major futures indices rose collectively, with Nasdaq futures up 0.26%, S&P 500 futures up 0.17%, and Dow futures up 0.12%. By the time the US market opened at 9:30 am Eastern Time, although the three major stock indices initially continued to rise, the gains narrowed compared to pre-market levels, with Nasdaq up 0.06%, S&P 500 up 0.03%, and Dow up 0.07%.
About 10 minutes after the market opened, the previously strong Nasdaq 100 and S&P 500 indices turned lower, and then continued to decline, with Nasdaq 100 closing down by about 2.2%. The "Big Seven" led the decline, with Nvidia initially leading the way, followed by Tesla plummeting due to the delayed release of RoboTaxi, leading the "Big Seven".
In the end, Tesla closed down 8.44%, ending the previous trend of 11 consecutive trading days of gains, Nvidia closed down over 5.5%, Meta down over 4.1%, Google A down 2.9%, Microsoft down 2.5%, Amazon and Apple down over 2.3%.
Overall, on a day with such positive US inflation data, large-cap tech stocks showed a trend of "selling the fact" during the day.
Meanwhile, the Dow fluctuated and ended slightly higher. The small-cap Russell 2000 index saw its gains expand during the day, closing up 3.6%, marking its best single-day performance since November 2023. In addition, Chinese concept stocks also showed strong performance, with the Nasdaq Golden Dragon China Index closing up over 2%.
Thursday's performance in the US stock market highlights the divergent trends of large-cap tech stocks and small-cap stocks. Thursday marked the worst relative performance of the Nasdaq 100 index compared to the Russell 2000 index since January 2021. It is worth noting that some analysts point out that this occurred at a significant fundamental price differential level, with each time the Nasdaq's market-to-sales ratio is 4.5 higher than the Russell 2000, bad things happen.
In fact, Thursday's trend had early signs. Earlier, Goldman Sachs trader Vincent Lin pointed out that since mid-May, some significant position changes have been quietly taking place. Despite the continued rise of US tech stocks driven by artificial intelligence infrastructure stocks, and significantly outperforming the broader market, hedge funds seem to be reducing their exposure to this sector.
Although the weight of information technology stocks in the US stock market indices has been steadily increasing and is at its highest level in years, Goldman Sachs Prime data shows that client net allocations to tech stocks peaked at the end of May and have been declining over the past few weeks As a result, hedge funds are now significantly underweighting technology stocks relative to the broad market index, by as much as 13 percentage points, the lowest level in years.
The long/short ratio of information technology stocks reached a peak of 2.13 in early May this year, before falling to 1.89, indicating that investors are more cautious.
From the perspective of fund flows from Goldman Sachs Prime data, information technology stocks were the sector with the most nominal net sales in June, and also the most net sales from July to date.
Hedge funds have been net sellers of information technology stocks on 16 out of the past 19 trading days, primarily driven by long selling, with some small-scale short selling as well.
Goldman Sachs Asset Management stated this week that U.S. small-cap stocks are expected to rebound in the second half of 2024, offering attractive valuations for investors looking to expand beyond large-cap stocks. Small-cap stocks can provide a way to access higher growth potential offered by future mid-cap and large-cap leaders, with more sectors benefiting from artificial intelligence. Additionally, the certainty surrounding interest rate cuts will also boost small-cap stocks.
However, Morgan Stanley has a different view. Strategists led by Michael Wilson believe that as the U.S. enters the election season, the market is considering a scenario where the Republican Party wins. Investors should focus on quality stocks, which typically have more stable earnings, stronger balance sheets, and higher gross margins, while staying away from small-cap cyclical stocks.
Alexander Morris, CEO of F/m Investments, recently stated that people are taking this opportunity to reassess whether now is a good time to allocate funds solely to this. He does not believe that Thursday's trend will form any trend, but it highlights that the market is looking for some different trades, rather than just being long on the seven giants or large tech stocks overall.