$iShares Russell 2000(IWM.US)The Nasdaq performed poorly, marking a continuation of the broader trend of shifting away from tech stocks in recent days. Wall Street sold off AI-related stocks as the increasing likelihood of a Fed rate cut in September boosted overall market optimism. On the other hand, this largely benefited small-cap and more cyclical stocks, which are seen as bigger beneficiaries of lower borrowing costs.

This trend peaked on Wednesday, with the Nasdaq plunging 2.8%, its worst day since December 2022. Wednesday also marked the first time since 2001 that the Nasdaq fell more than 2.5% in a single trading session, while the blue-chip Dow Jones Industrial Average rose. On the other hand, the Dow closed above 41,000 for the first time during the session.

This rotation also explains why the small-cap-focused Russell 2000 Index has risen more than 9% over the past five trading sessions. In contrast, the Nasdaq fell more than 4% last week.

"Clearly, a Fed rate cut would benefit small businesses," said a senior overseas investment strategist. Meanwhile, "there has been some caution and profit-taking in this year's lucrative tech stocks."

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