US stock market rally extends as investors await Fed

By David Randall

NEW YORK (Reuters) – A rally in U.S. stocks offered an encouraging signal to investors worried about a rally in tech stocks as markets await key jobs data and expected rate cuts by the Federal Reserve in September.

As the market’s fortunes continue to rise and fall with big tech stocks like Nvidia and Apple, investors are also putting money into less-loved, small-cap stocks that are expected to benefit from rates lower interest rates. The Fed is expected to start a rate-cutting cycle at its September 17-18 monetary policy meeting.

Many investors see the rally, which gained momentum last month before faltering during an early August selloff, as a healthy evolution of a market rally led by a group of giant tech names. Chipmaker Nvidia, which has benefited from bets on artificial intelligence, alone accounted for about a quarter of the S&P 500’s 18.4% annual gain.

“No matter how you slice it, you’ve seen a pretty significant expansion, and I think it has legs,” said Liz Ann Sonders, chief investment officer at Charles Schwab.

Value stocks are those of companies that trade at a discount to values ​​such as book value or price-to-earnings ratio and include sectors such as financials and industrials. Some investors believe that gains in these sectors and small caps could continue if the Fed cuts borrowing costs while the economy remains healthy.

Market turnover has accelerated recently, with 61% of S&P 500 stocks outperforming the index over the past month, compared with 14% outperforming over the past year, Charles Schwab data show.

Meanwhile, the so-called Magnificent Seven group of tech giants — which includes Nvidia, Tesla and Microsoft — has underperformed the other 493 S&P 500 stocks by 14 percentage points since the July release of a weaker-than-expected U.S. inflation report expected. 11, according to an analysis by BofA Global Research.

Shares also held up after an Nvidia forecast fell short of investors’ lofty expectations earlier this week, another sign that investors may be looking beyond technology. The equal-weighted S&P 500, a proxy for the average stock, hit a new record high this week and is up about 10.5% year-to-date, closing its gap with the S&P 500.

“When market breadth improves, the message is that a growing number of stocks are rallying on expectations that economic conditions will support earnings growth and profitability,” wrote analysts at Ned David Research.

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Value stocks that have performed well this year include General Electric and midstream energy company Targa Resources, which are up 70% and 68%, respectively. Meanwhile, the small-cap Russell 2000 is up 8.5 percent from the month’s lows, though it hasn’t topped its July peak.

Next Friday’s nonfarm payrolls report could help support the case for broader market growth if it shows the labor market cooling at a steady, though not alarming, pace, said David Lefkowitz, head of US equities for UBS Global Wealth Management.

The jobs report “tends to be one of the more market-moving releases overall, and at this point it will get even more attention than normal.”

Investors are unlikely to turn their backs on tech stocks, especially if volatility gives them a chance to buy cheap, said Jason Alonzo, portfolio manager at Harbor Capital.

Tech stocks are expected to post market-beating earnings growth every quarter through 2025, with third-quarter gains reaching 15.3%, compared with a 7.5% gain for the S&P 500 as a whole, according to LSEG data .

“People will sometimes take a deep breath after a nice run and look at other opportunities, but technology is still the clearest driver of growth, especially the theme of AI, which is innocent until proven guilty,” Alonzo said.

(Reporting by David Randall; Editing by Ira Iosebashvili and Richard Chang)