4 charts on the rotation of technology and growth stocks

VaselineSeptember 9, 2024

0 4 minutes read

4 charts on the rotation of technology and growth stocks

After a blistering run, the growth in mega-sized tech stocks continues to deflate. The latest swoon came with renewed fears about the economy’s outlook. But with most economists seeing little chance of a recession and rate cuts by the Federal Reserve on the way, the biggest challenge remains valuations of previously traded stocks, as well as the market as a whole.

Under the hood, this is a rotation, meaning investors are moving away from recent winners to names that have lagged behind. In this case, the overall shift was from growth stocks to value stocks.

Stock market pullbacks over time

Line chart showing the performance of the US market over the last 10 years.

Over the past two years, tech stocks have dominated the market. From its 2022 market low on October 22, 2022, to its most recent market high on July 16, 2024, the Morningstar US Market Index gained 54.1%. The tech stock rose 109.5% in that period, beating the market by more than twice and contributing 25.3 percentage points to the total gain. The next biggest contributor, communications services, added 6 percentage points.

Since the stock market peak in July, tech stocks have fallen 8.5 percent, compared with a 1.6 percent loss for the broader market. The technology sector lost 2.9 percentage points of the total market return during this period – more than five times the amount lost by any other sector.

“This summer, we’ve seen a rotation away from the most AI-related sectors and stocks and into more defensive sectors and stocks that have lagged the market’s growth,” says Dave Sekera, chief US market strategist at Morningstar.

“Overall, investors have recognized that most AI plays have become overvalued and overextended. As valuations rose too much for large-cap AI stocks, valuations looked even more attractive among value and small-cap stocks. Earlier this year, we noticed that value stocks. and small caps have approached the most undervalued levels relative to the broader market valuation in the past decade.”

AI leads down after leading the way up

The big AI names that led the market up from October 2022 to July 2024 are the same ones that have dragged the market down over the past month and a half.

Nvidia ( NVDA ), which has rallied more than 900% from its 2022 low to its 2024 peak, contributed 7.9 percentage points to the overall market’s gain — the biggest contribution of any stock. It has fallen 15.9% since its market peak and is off 0.9 percentage points from the market’s return – the biggest drop of any stock.

Six of the first seven contributors to the market rally are now its main detractors. The lineup of the top four is the same: Nvidia, Microsoft (MSFT), Alphabet (GOOGL), and Apple (AAPL). Amazon ( AMZN ) and Broadcom ( AVGO ) round out the ranks. Meta Platforms ( META ), the fifth-largest contributor to the rally, is up 3.1% from its peak.

AI won’t be an “overnight game changer,” says Adam Hetts, head of multi-asset management at Janus Henderson. “It will take some time.” He sees the rotation as a healthy development. “We can be thankful that the AI story is a bit of a distraction to the larger, more important narrative: the soft landing is intact and rate cuts are coming. That supports the wider market, which doesn’t have to live and die by it. the AI trend”.

The top contributors to the market since the last peak are UnitedHealth Group ( UNH ), which has gained 16.2 percent, and Berkshire Hathaway ( BRK.B ), which has gained 9.8 percent. Both stocks contributed 0.14 percentage points to the market’s return. The next three biggest contributors are AbbVie ( ABBV ), Johnson & Johnson ( JNJ ), and The Coca-Cola Company ( KO ), which have climbed more than 10% since the market peak.

Value stocks take a hit as growth stocks sink

Growth stocks outperformed value and stocks combined during the market reaction, but have lagged since then. In particular, high growth stocks, which include Nvidia and Amazon, saw the most volatility.

Value stocks were steadier, gaining 18.3% on a yearly basis during the rally and up 4.4% since then. Shares in the Blend, which includes Microsoft, Alphabet, Apple, Meta and Broadcom, gained 26.2% annually during the rally and are down 0.8% since then.

“Small-cap stocks should do well with interest rates falling and the Fed easing monetary policy,” notes Sekera. Meanwhile, “value stocks, which have lagged behind in the rush to buy AI stocks, should outperform as the economy slows.”