Investors shift from Big Tech to smaller companies in anticipation of Fed rate cut

Big Tech stocks plunged on Thursday, July 12, after unexpectedly positive inflation data came out. Investors began shifting capital from the Magnificent Seven to small-cap stocks, anticipating growth in the latter after a potential Fed rate cut in September, Bloomberg reports.

Details

Thursday marked the worst day of the year for the Magnificent Seven stocks. Apple fell 2.3%, Microsoft 2.5%, Nvidia 5.6%, Alphabet 2.8%, Amazon 2.4%, Meta Platforms 4.1%, and Tesla 8.4%, also pressured by news that the unveiling of Robotaxi would be delayed. The Bloomberg index tracking these stocks dropped 4.1%, the largest decline since July 2023.

The Big Tech sell-off triggered a 1% drop in the S&P 500, which had been on a winning streak for the past two weeks. Meanwhile, the Russell 2000 small-cap index climbed 3.2%, its best performance relative to the S&P 500 since March 2020. The Goldman Sachs index of nonprofitable tech stocks, which typically have higher debt loads, gained 3.3%, Bloomberg reports.

Reasons for Big Tech losses

Investors began to pull their money out of the largest tech stocks after an upbeat inflation print, which boosted Wall Street’s hopes for a Fed rate cut in September. The core CPI (excluding food and energy) increased 3.3% year-over-year, the smallest rise since April 2021. This was seen as a signal for capital rotation, analysts believe. Reuters notes that 12.6 billion shares were traded on U.S. exchanges on Thursday, compared with the 20-session average of 11.5 billion shares.

“Folks use this as the moment to say ‘here’s a good point to reassess whether this is the only place we should be allocated,’” F/m Investments CEO Alexander Morris told Bloomberg. “I wouldn’t look at today as forming a trend of anything, but it is underscoring the market was looking for something different, some different trade than just go-long the top-seven tech names or go-long big tech in general.“

The Nasdaq 100 tech index is up 23% this year, adding over $6 trillion in market value. Thursday could have been a turning point for markets and serves as a reminder of the importance of diversification, Bloomberg quoted Ritholtz Wealth Management strategist Callie Cox as saying.

“The S&P 500 is down today, but this is the best kind of sell-off you could hope for if you’re a long-term investor,” Cox noted.