A mild US economic deceleration, interest rate cuts by the Fed and an improving earnings profile could further support the broadening of the rally outside the expensive US technology names.
- The S&P 500 (excluding mag 7) has delivered strong gains this quarter, outperforming the large tech stocks.
- This is an indication of a rotation out of expensive names towards the rest of the market and small caps.
- Earnings strength, economic growth and Fed actions are important for this broadening of the rally to continue.
US equities are experiencing a broadening of the rally seen in the first half (H1) of the year. The performance of the seven largest US mega-cap tech-focused stocks in H1 was strong, but these gains are now becoming more broad-based. In the quarter so far, the S&P 500 has outperformed the Mag 7 in the seven out of nine weeks. This is a result of multiple factors such as markets questioning the exuberance around artificial intelligence, corporate earnings and concerns over US growth. Increasing expectation of rate cuts by the Fed was also an important driver. This rotation out of the expensive sectors is likely to continue, but it may not be uni-directional and could be affected by volatility around US elections. Hence, it is important for investors to consider company fundamentals to generate potential sustainable returns.
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