Wall Street’s Great Rotation

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For most of this year, there was only one direction major stock indicase like the SMP five hundred and NASDAC were headed, and that direction was up.

And SMP five hundred at fifty three hundred a fresh record high, a fresh record high for the Dow Jones Industrial Average, a fresh record high for the NASAK Composite, and the Nasdaq one hundred. So we have record highs for the three major indexes and the second day of record highs for both the SMP five hundred and the NASAK.

Yesterday the STALK six hundred cloths that a fresh record high.

That's eight days of gains.

Equity markets are on attack, but this week that euphoria came crashing down.

The majority of the names are certainly down. Tesla shares falling more than twelve percent today, the biggest drop since September of twenty twenty. Down, down, down on the day, so at least inequities it's to find a place to hide today.

On Wednesday, the s and P five hundred fell by two point three percent, ending its longest streak without dropping by two percent or more in seventeen years. According to Bloomberg Data and the tech heavy Nasdaq saw an even more dramatic selloff.

Than NASAK, the worst of the bunch, losing more than three and a half percent. Again, these are the biggest declines since late twenty twenty two.

End of markets recovered a bit to end the week, but for some, this week's selloff didn't seem like just a blip. Instead, it could be the beginning of a new era in markets. Today on the show, Welcome to the Great Rotation is everything we thought we knew about markets this year about to flip. I'm Sarah Holder, and this is the Big Take from Bloomberg News. To understand the week that was in markets, I spoke to isabel Lee. She's a reporter on Bloomberg's Cross Asset team.

A lot of people wonder what that is, but we cover more macro trends and the niche parts of the markets that you wouldn't really think of in the beginning. But our team is the best team.

The Big Take team might argue with that one, but anyway, when it came to markets, I started by asking Isabelle about the positive and asked her what it was that was propelling markets up and up and up for the majority of this year. So Isabelle, let's go back in time to say, three weeks ago, the S and P five hundred and the Nasdaq hit another record high. What was behind that rally?

It's just really the euphoria surrounding artificial intelligence. It all began when chat GBT was introduced to markets, or at least when people were aware of chat GBT. Since then, big tech just rallied and broke record after another. I think this year markets broke records like more than thirty times.

And then when did you and the Bloomberg Markets team have a sense that something might be shifting? What were the first warning signs?

I think it's safe to say that it all began around July eleven. That's when the CPI report came out, and it came out softer than expected. So that's good because it showed CPI was cooling to the fastest pace since twenty twenty one, and many read this as a sign that the Fed can cut rates. At this point, it's really just a matter of when, not if. So that was the day we saw a massive rotation.

A massive rotation. According to Isabelle, July eleventh was when what some are calling the Great Rotation began, and it's all because investors started to really think about what lower interest rates might mean for companies, and in particular smaller companies. I asked Isabelle to define this great rotation in a sentence.

I think, in a sentence, it means a shift in dominance with whoever is outperforming in the market. So for the longest time, it's megacap tech stocks at tech Behem's the big companies, and now we're seeing potentially small caps, which are basically smaller companies. Small caps means smaller capitalization, they have smaller market values, and everyone's saying that they

Small caps are more levered, which means they have more debt. Their fates are also more closely tied to the health of the typical consumer. And now it's looking like the economic case for a rate cut has only gotten stronger, which for those reasons, would benefit these mom and pop companies more so. On July eleventh, the great rotation towards small caps started.

That was the day where we saw they wrestled two thousand, So that's a gauge of small cap stocks beating DNASTAK one hundred, a gauge of big cap stocks, by five point eight percentage points. So at that point that was the most since of ever twenty twenty. So this was I think the beginning of the shift, or the so called rotation.

And that shift accelerated. On Wednesday of this week, the S and P five hundred and Nasdaq fell by two point three percent and three point seven percent, respectively, the most since late twenty twenty two. I asked Isabelle what was behind this selloff?

So it was really the lukewarm earnings we saw the day prior after market close, Alphabet reported earnings. They reported a bloated capital expenditure. Tessa also reported earnings and it was a miss and they delayed again the ROBOTAXI. So it really got investors thinking, when are we going to see the return on investments on everything they're spending on AI they're lavishing billions of dollars on that, But obviously

Right, does it mean that they're getting disillusioned with AI and what would have to change for them to get excited again?

It really depends. In markets, there are always two camps. And of course there's a camp that says it's a bubble, it will burst soon and it's just a matter of when. But then the other camp is like, no, we believe in these companies, even their fundamentals, their balance sheets, Like how can this be not the feature of tomorrow? And I mean, if you look at the companies that are powering their rilly, they're just really getting bigger and bigger.

Well what went through your head when you saw those huge dips this week? Well, the first question was does this rotation have legs? Like is this the beginning or is this just a blip? Now it looks like it's just a blip, But again it still depends on who you ask. I think we're just in the early days. The early days. Isabelle pointed out that of the so

And Vidia, which a lot of my friends are the most excited about. There's so many memes online about in Nvidia about how all their employees are just mega rich. Anyway, they set to report in August twenty eighth, so it's still a month from now.

Well, how is on video doing.

In Vidia is here today, It's up more than two hundred percent. That's kind of crazy. Microsoft is up just more than twenty percent, so it's not even a close call, but it just really underscores how Invidia is the biggest beneficiary by far of this AI trade. I mean, twenty percent is good, but if you compare it to two hundred, it's it's really a wow.

Yeah, why is it valued so high? Is it overvalued?

I Mean, there are many reasons why stocks go up, but it's really just investor enthusiasm because they were early in the game, and the demand for chips, especially in this area is really it's still incredibly high, and Vida is just poised to capture all of that. And they're also one of the first movers and the biggest. I'll

Well, it's funny because you're saying that, you know, some of what we're seeing in the market is potentially investors getting disillusioned with AI or some of that excite cooling down. And Video is kind of an exception to this. Still, yeah, what are you looking out for when and Video reports?

The thing with these megacap companies is a lot of them report good earnings, but it's just that expectations are so lofty that even good earnings sometimes don't cut it. Here's the thing. A lot of the Magnificent seven stocks, their earnings are now macro events. They're not anymore just like earnings, you know, Oh yeah, I'll just read it the next day. It's like a macro event, and the stock market moves, which can change everything. Yes, because their

So the expectations for the Magnificent Seven were so high that even good earnings might not be enough to appease investors. And that fact, coupled with the reality that interest rate cuts benefit smaller companies more than big tech firms, means that we've been seeing a shift. I asked Isabelle, if that means that the Russell two thousand, the index of all these small cap stocks, was the place to be.

It depends on who you ask, but it's always good to I'm gonna sound like a boring portfolio manager or responsible portfolio never never, but you should always really diversify because now you could see that. For instance, we're writing about this mutual fund that was the best performer here, Todate, and it really basically held a lot of the megacap

Coming up after the break, how to tell if this great rotation is just a blip and what to do if it's not. Markets are having a bit of an anxious moment. Is the euphoria of AI's potential to transform the world wearing off? Or is this just a blip? I asked Bloomberg Cross Asset reporter Isabelle Lee when we might have an answer, and she said that we're still early in earning season. Sixty percent or three fifths of companies in the S and P five hundred are still

So that's a good thing because that's the biggest such expansion since the last three months of twenty twenty one, and that's according to data by Bloomberg Intelligence. So it's still looking to be a good earning season. But again, how good depends on investor expectation. It still remains to be seen.

Well, let's get into some of those macro events that might be impacting the markets. We've been seeing a lot of releases that have bolstered the case for the FED to cut rates at its meeting in September. How is all of that Fed chatter impacting what we've been seeing in markets?

So the consensus this markets is still expecting a rate cut in September. But we have some like Bill Dudley, who is a former ne York FED president and Bloomberg opinion columnist who now calls for a rate cut in July.

One of the interesting sort of quandaries of the FED is in it right now. They've telegraphed it pretty clearly that they're going to move in September, and it sort of bigs the question it was so obvious that you need to move in September, then what are you waiting for? Why not just move in July?

But Isabelle says that a cut in July versus a cut in September isn't going to be that big of a deal for markets.

It's just twenty five basis points in the grand scheme of things. That doesn't matter a lot. We're going to see a ton more and it's just three months. I mean, we've had this elevated interest rates for like over two years. So to some it doesn't really matter. They just want clarity.

Something else that's probably making everyone's job a little harder is all of the political news that we've had in the US over the past couple of weeks that I assume have made some sort of impression on the market. There was the attempted assassination of Trump. Biden stepped down and endorsed Kamala Harris last weekend. How is this dramatic news cycle and the US presidential election more broadly showing up in these numbers?

That was a big question. Actually, now it's just becoming a lot more noisy, and we don't know why markets or why some asset classes move. So I was also working that weekend, and the sense that I got from the people I bugged and who were kind enough to reply it to me was there was a sense of calm because if she at that point, they were like, okay, then if she ends up being the nominee, then we can finally get clarity that it's going to be Harris

Well, how does stocks tend to perform on election years?

So I have tidbit from about that. So since nineteen twenty eight, data from Bloomberg Intelligence shows that the S and P five hundred has gained roughly five percent on average in the third quarter of election years. So in general, this logs positive returns nearly two thirds of the time from the June to September period.

Interesting. So as well, there's like this golden rule of economics podcasting where if you try to make an episode about markets going down, markets will inevitably go up on the day you publish. That upswing is likely here already, as you mentioned, So after all of this, is what we're seeing just a normal market fluctuation, or is it a sign of some deeper problems brewing.

You're going to be annoyed with me because I'm going to play it safe, and I'm going to be every podcast host nightmare because I'm going to say it's too early.

Okay, when will we tell why should.

We have you back? Honestly, I think towards the end of the third quarter, because then the election season will really be have picked up, and then earning season would have been done. We would have seen whether the Fed indeed cut in September. But then if you ask me again at that time, I'm probably going to say fourth quarter, and then fourth card, I'm going to say twenty twenty five. But on a serious note, I think towards the end of the third quarter we'll see more clarity.

Got it, Well, we'll be calling you back. So as well, given all this, what's a regular person with some money in the stock exchange supposed to do? How should we be thinking about this?

I'm going to echo what everyone does and what I personally do. Actually, I just dump everything index funds. I mean, yes, you don't see spectacular gains like oh my gosh, if I have Nvidia, I would probably have down payment for a house right now, but for now, for now, yes, but index is safe, and I mean the way I look at it is it's for a retirement. It's for when I'm old and hopefully just sit by the beach and sip coconut juice. So I just dump everything in the index.

Wise words boring, right, that's safe, boring, but safe. If it gets you on a beach with some coconut water, I guess that could be good enough to stay in the loop with the latest market moves. You can find all of our coverage at bloomberg dot com slash markets. This is the Big Take from Bloomberg News. I'm Sarah Holder. This episode was produced by David Fox. It was fact checked by Thomas lou and Adrianna Tapia. It was edited