Why Slumping Tech Stocks Are Good News for Investors

Investors may be jittery about the ongoing selloff in tech stocks, but there's a silver lining: The recent developments actually signify strength for the bull market.

This week, the S&P 500's tech sector has fallen by -5.20%, with some of the biggest losers being market darlings Nvidia (-8.18%), Amazon (-5.20%) and Alphabet (-3.03%). But the fact that shareholders are liquidating their positions in Big Tech doesn't mean the stock market overall is in bad shape.

Rather, what we're seeing is a dramatic shift in sector rotation and the rise of small-cap companies, demonstrating a more broad-based bull market that isn't solely reliant on optimism around AI.

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Small caps join the party

While the major indices have been enjoying a banner year, companies with small market capitalizations have largely been left on the sidelines. The Dow, Nasdaq and the S&P 500 have set dozens of all-time highs in 2024, while the small-cap index was only able to muster a gain of 0.83% through the first six months of the year.

However, that's all changed over the past several weeks. Since July 1, the Russell 2000 — which tracks the smallest 2,000 stocks in the small cap Russell Index — has gained 7.66%, outpacing every major index. In contrast, over the same period, the Dow is up 2.73%, the S&P 500 has gained 0.69%, and the tech-heavy Nasdaq-100 is down -1.30%.

This is just one indication that the current bull market is now expanding beyond the so-called Magnificent Seven stocks (Alphabet, Amazon, Apple, Microsoft, Meta, Nvidia and Tesla), which currently account for 31% of the weighted S&P 500.

Bank of America's head of U.S. equity and quantitative strategy Savita Subramanian told Yahoo! Finance the trend in small caps is "likely to persist." Subramanian noted that many companies in the Russell 2000 are currently undervalued. "Their valuations are at levels that would warrant a pretty equitable comeback," he said.

Stock market sector rotation

Looking at the broader picture, the S&P 500 isn't suffering losses across the board. In fact, of its 11 sectors, only tech is in the red over the past month, having seen losses of $900 billion in market value this week alone. This suggests investors are recognizing that while one sector may be perceived as overvalued, the remainder are seemingly undervalued — and worth buying.

This trend of inflows into value stocks in sectors like financials, energy and real estate could persist as the likelihood of a September rate cut (currently pinned at 98.1%) by the Federal Reserve continues to gain momentum. Over the past month, those three sectors have seen gains of 4.89%, 5.36% and 5.41%, respectively.

So far this week, the biggest winners in those sectors are Equity Residential (3.66%), Capital One (4.31%) and oilfield services provider Schlumberger (6.84%).

This sector rotation into value stocks and the simultaneous rise of small caps is evidence that the current bull market — which began in earnest in October 2022 — is gaining broad-based strength and isn't being solely propelled by overinflated AI and tech stocks.

Ultimately, this is a sign of strength that can provide buy-and-hold investors — including even those with holdings in tech — a bit of relief.

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