Tech giants stumble, small-cap stocks feast! When will the big rotation in the US stock market end? This indicator is crucial

Recently, the trend of small-cap stocks performing well may continue. Goldman Sachs stated that the rotation trend of tech giants towards small-cap stocks will persist, reasons including rate cuts, stable economic growth, Trump's expected re-election, and the narrowing of premium for large-cap stock growth. If large tech companies exceed market expectations and raise revenue guidance, the performance of the S&P 500 index will rebound. This trend will depend on revenue revisions

According to the financial news app Zhitong Finance, Goldman Sachs stated that the trend of rotating from large-cap tech stocks to small-cap stocks will continue until large companies raise revenue guidance.

Goldman Sachs stock strategist David Kostin stated that the Russell 2000 Index has recorded its strongest five-day performance relative to the S&P 500 Index in at least 40 years.

He said, "Out of the total return of 16% in the S&P 500 Index from the beginning of the year, only NVIDIA (NVDA.US) contributed more than a quarter."

Kostin mentioned, "Along with Microsoft (MSFT.US), Apple (AAPL.US), Alphabet (GOOGL.US, GOOG.US), Amazon (AMZN.US), and Meta (META.US), these 6 stocks have contributed 55% of the total return of 16% year-to-date. However, in the past 7 days, NVIDIA's stock price has plummeted by 13% (although it is still up 138% year-to-date). Other stocks have generally fallen by around 7% (but the average return year-to-date is 23%)."

Kostin believes that the rotation is driven by four reasons:

With the Fed expected to cut interest rates and U.S. inflation data slowing down, this means that interest expenses for small-cap stocks will decrease;
Stable economic growth data;
Market expectations that Trump will win the U.S. election, and during Trump's presidency, small-cap stocks outperformed other companies and were less affected by tariffs;
Narrowing of the growth premium for large-cap stocks.

"The recent strong performance of small-cap stocks may continue unless there are significant changes in the macro environment, or large-cap tech stocks announce second-quarter results that prompt analysts to raise revenue estimates for the next few quarters," Kostin stated.

"In the late 1990s during the Internet boom, revenue revisions were a key variable to watch because they ultimately signaled when momentum would reverse," he added. "The potential recovery of AI trading—thus reversing the recent underperformance of large-cap stocks compared to small-cap stocks—will depend on revenue revisions."

"If large tech companies exceed market expectations and raise their forward revenue guidance, the outstanding performance of the S&P 500 Index will resume."