The market smells the new bull market in US stocks! Maybe just waiting for the "Magnificent 7" to kick in

According to the Zhitong Finance APP, as traders in the stock market become increasingly confident that the first rate cut since the Federal Reserve's current rate hike cycle is imminent, driving the recent surge in US stocks, especially mid-cap and small-cap stocks, in addition to the "Magnificent 7" tech giants that have seen their stock prices soar since 2023.

Therefore, some traders who are extremely optimistic about the future of US stocks believe that this healthy "rotation market" is catalyzing a widespread bullish sentiment towards the upcoming new bull market in US stocks, which is expected to push the benchmark index of US stocks - the S&P 500 Index - to continuously reach new historical highs.

The "Magnificent 7" tech giants with high weightings in the S&P 500 Index, including NVIDIA (NVDA.US), Apple (AAPL.US), Microsoft (MSFT.US), Google (GOOGL.US), Tesla (TSLA.US), Amazon (AMZN.US), and Meta Platforms (META.US), have all experienced a comprehensive pullback since July after their stock prices surged in the second half of 2023 and the first half of this year.

Global investors flocked to the seven tech giants led by NVIDIA in 2023 and the first half of 2024, mainly because they viewed these cash-rich giants as a "safe haven" in the face of uncertain rate cut expectations and economic slowdown, and they bet heavily on the global trend of companies investing heavily in AI. Due to the massive market size and financial strength of tech giants like Apple and Google, they are in the best position to leverage AI to expand revenue.

US Stock Bull Market "Comprehensive Rotation" Requires Participation of the Magnificent 7 Tech Giants

However, some more cautious strategists believe that the current "rotation market" in the US stock market does not necessarily indicate the typical "comprehensive rotation" that signals the beginning of a bull market. In their view, the current surge in mid-cap and small-cap stocks represents a "style shift" in the market, and the "comprehensive rotation" that heralds the start of a new bull market requires the active participation of the previously battered "Magnificent 7" tech giants. Strategists generally agree that this style shift can to some extent dispel the perceived "AI bubble" without causing a continuous sharp decline in the S&P 500 Index.

The current market style shift from the overvalued seven tech giants to targets outside of the giants. If market funds fail to flow back to the seven tech giants, which account for a weight of up to 35% in the S&P 500 Index, the focus will remain on mid-cap and small-cap stocks that have been hit hard since the rate hike cycle in 2022, as well as popular cyclical stocks. This implies that the S&P 500 Index may trend sideways or even turn towards a sustained decline in the remaining time of the year.

Statistical data shows that the equal-weighted version of the S&P 500 Index, which excludes market cap bias, has just recorded its best two-week performance relative to the market cap-weighted S&P 500 Index since 2020. Currently, ETFs tracking the S&P 500 Index are anchored to the market cap-weighted version of the S&P 500 Index For the equal-weighted S&P 500 index, which has been lagging behind the market-cap weighted version for several months, this is a significant shift. At the same time, the optimistic sentiment towards the eventual monetary easing policy is driving investors away from the seven tech giants that have long been seen as a "safe haven".

Looking at the entire U.S. stock market, the core logic behind the seven tech giants outperforming the value stocks and broad small-cap stocks since 2023 lies in the global AI trend, the uncertain Fed rate cut expectations, occasional waves of rate cut expectations, the not-too-strong growth trend of the U.S. economy, and not weak enough to fall into a recession. In such a trading environment, the seven tech giants have become a "safe haven" for global funds facing uncertain rate cut expectations and slowing economic growth, thanks to their unparalleled AI revenue scale, solid fundamentals, strong free cash flow reserves, and expanding stock buyback programs.

"All of this is because the bench strength of the stock market has finally stepped up." said Todd Sohn, Managing Director of ETF and Technical Strategy at Strategas Securities. "While all the top players from NVIDIA to Microsoft have paused their momentum, other members of the team have stayed true to their commitments, and the most overlooked companies have seized an opportunity to rise."

As the S&P 500 index and the tech-heavy Nasdaq 100 index focusing on large-cap tech stocks recorded their worst weekly performance since April, investors are now questioning whether the long-suffering small and mid-cap stocks can continue to shine, whether the seven tech giants can rebound in time, and how the U.S. stock market will perform when the Fed finally announces a rate cut.

Historical data shows that Fed rate cuts do bring strong stock market returns, but only in non-recessionary cycles. Perhaps this round of rotation will be based on the economic growth cycle rather than the recession cycle. Loose monetary policy often stimulates a sharp rebound in interest rate-sensitive stock targets such as utilities, essential consumer goods, and biotechnology.

In the first half of this year, as the S&P 500 index repeatedly hit new all-time highs, some Wall Street institutions began to worry that this round of the U.S. stock bull market, involving only a few tech companies besides the tech giants, was coming to an end. However, as the market style shifts to small and mid-cap stocks, they are starting to believe that a new bull market will begin under the "comprehensive rotation".

To understand how top-heavy the S&P 500 index is, consider this data: since the start of the U.S. stock bull market 21 months ago, the S&P 500 index has risen by about 54%, while the equal-weighted version of the S&P 500 index has only risen by 30% Data compiled by institutions shows that in the previous four rounds of the bull market in the US stock market, when it reached the 21-month stage, on average, the equal-weighted S&P 500 index had outperformed the market-cap weighted index by 15 percentage points.

Comparison of the S&P 500 Index with previous bull markets since 1990 - the equal-weighted S&P 500 index still significantly lags behind the market-cap weighted index after running for 21 months

The S&P 500 index has been on a strong uptrend in recent months, with 28 out of 38 weeks since hitting a recent low at the end of October seeing gains, and fund managers are starting to increase exposure to sectors outside of technology. Data compiled by EPFR Global and Bank of America shows that as of last Wednesday, inflows into small-cap stocks reached $9.9 billion, the second-highest on record.

If the seven giants rebound together, the S&P 500 index is expected to continue to hit new highs

Renowned stock strategist Jim Paulsen correctly predicted a major rebound trend in the previously forgotten corners of the market outside of technology this month, forecasting that non-tech companies will support the next phase of the US stock market bull run.

"In history, being able to eliminate what many consider a bubble without triggering a larger sell-off is rare. The key question is whether large-cap tech stocks can have a healthy pullback, slightly reducing their high concentration without causing a sharp drop in the S&P 500 index."

Whether this trend will continue is everyone's guess, but some technical indicators look a bit tense. The S&P 500 index was briefly 15% above its 200-day moving average last week. Data compiled by Financial Enhancement Group's technical analyst and portfolio manager Andrew Thrasher shows that this gap appeared before the index fell in 2011, 2015, and 2018.

The S&P 500 Index just ended its best two weeks in a year in the first half of July, and is approaching the most challenging period in August and September (when US stocks tend to be relatively sluggish).

For the seven major tech giants, the most significant catalyst undoubtedly lies in the upcoming release of their performance later this month. If the actual performance is exceptionally strong, it may trigger a global capital inflow into the seven major tech giants, thereby continuing to drive the S&P 500 Index to repeatedly hit new historical highs in the second half of the year. The US government will release the preliminary estimate of the second-quarter US Gross Domestic Product (GDP) on Thursday, and the inflation indicator favored by the Federal Reserve - core PCE - will be released on Friday. These factors may provide insights into interest rate prospects and the potential trend of the S&P 500 Index.

The market generally expects that US economic growth will remain strong. The GDPNow model compiled by the Atlanta Fed predicts that the annualized quarterly rate of real GDP in the second quarter of the US will rise from 1.4% in the first quarter to 2.7%.

Julie Biel, a portfolio manager at Kayne Anderson Rudnick, said: "Investors will not tolerate struggling profit growth of the companies they hold for more than a quarter." "But as soon as there is any sign of a change in market rotation, fund managers will chase it, because if they chase the market trends early, it will have far-reaching benefits for their portfolio performance."

Recently, the international bank UBS once again significantly raised its target level for the S&P 500 Index. The institution now expects the S&P 500 Index to close at 5,900 points this year (the index closed at 5,505 points last week). The institution has also set an "optimistic target for the bull market" of up to 6,500 points by the end of this year, which means a potential bull market upside of up to 18%.

It is worth noting that UBS initially set the year-end target for the S&P 500 Index at only 4,850 points, but as the global AI boom helped the index continuously break historical records, UBS has raised its target for the S&P 500 Index four times this year: from 5,150 points in January, 5,400 points in February, and 5,600 points in May, to the current 5,900 points.

The UBS US stock market investment strategy team stated in its latest report: "We believe that the background of the US stock market remains favorable due to the following factors: steady and expanding profit growth, slowing inflation, the Fed's shift to rate cuts, and the surge in global corporate investment in artificial intelligence infrastructure and applications under the AI boom, which continues to drive the market capitalization growth of the seven major tech giants."

The UBS strategy team emphasized that the upcoming Q2 performance of the seven major tech giants is crucial for the S&P 500 Index, and the institution is optimistic about the continued revenue impact brought by the AI boom, which will drive the performance of companies like NVIDIA among the seven giants to exceed expectations and further propel the S&P 500 Index to new highs. The report mentioned that the impact of artificial intelligence technology on corporate productivity and profit growth is much larger than investors generally expect Well-known Wall Street investment firm Wedbush recently stated that tech giants such as Microsoft, Google, Amazon, and Meta are expected to achieve strong performance in the second quarter. The firm pointed out in a recent report: "In short, our research on global tech companies shows that the performance of cloud computing deployments and enterprise AI spending far exceeds Wall Street expectations, which is a good sign for tech giants." "We believe that the second-quarter performance will be a key positive catalyst for tech stocks, with US tech stocks expected to rise by about 15% for the rest of the year after a strong 24% increase in the first half of this year, and the broader artificial intelligence tech growth story now taking center stage."