Insights and Strategies
Is It Time to Broaden Our Focus?
Just as a spotlight moves across different performers on stage to showcase their unique talents, market rotation shifts focus among various sectors and asset classes based on their performance and potential. For the past two years, the Magnificent Seven and semiconductor firms have been the stars, with Nvidia taking a leading role, delivering exceptional performances to the rhythm of the A.I. theme. Meanwhile, other performers, such as rate-sensitive sectors and small-cap stocks, have played supporting roles or waited in the wings. In early to mid-July, these previously sidelined sectors stepped into the limelight, gaining some audience attention after striving for recognition since last October. The question now is: Should we continue to spotlight the current stars, or is it time to use a wide angle light to broaden our focus and explore these emerging sectors?
How the spotlight transitions (whether it is fast, slow, or choppy from here) depends mainly on two factors: (1) central bank rate decisions and (2) future earnings expectations; with both being ultimately driven by the macroeconomic backdrop. Given our soft landing expectations, with two rate cuts by the end of 2024 in the U.S., we expect resilient earnings across most of the defensive and rate-sensitive sectors in S&P 500 to support the continuation of sector rotation from mega-cap tech to these sectors. As for small-cap stocks, we need to see more fundamental improvement in their earnings to be convinced that they are ready to outperform for an extended period.
