The Potential Pause in the US Big Tech Stock Rally

The red-hot rally in US big tech stocks might be cooling off, paving the way for other market segments to shine. Despite the S&P 500’s overall 14.6% gain this year, tech and communication sectors have surged ahead with gains of 28.2% and 24.3% respectively. This concentration of gains in a few sectors has left other segments more subdued, with utilities being the next best performer at only 9.5% year-to-date.

Investors are starting to worry that the tech rally may be overheated, especially with eye-popping gains like Nvidia Corp’s 155% surge this year. As a result, market laggards such as small caps and value stocks in sectors like financials and industrials are beginning to look more attractive.

According to Michael Purves, CEO of Tallbacken Capital Advisors, a rotation out of big tech stocks could help alleviate concerns of concentration in the market. With about 60% of the S&P 500’s total return this year driven by just five companies, a shift towards other sectors could bring more balance to the market.

Recent signs of exhaustion in big tech stocks have also emerged, with Nvidia shares dropping 10% from their peak and the company losing its title as the world’s most valuable company. Economic data, including inflation numbers set to be released later in the week, could further impact investor positioning.

Barometers such as the Relative Strength Indicator and price ratio between the Nasdaq 100 and S&P 500 Equal Weight Index are signaling that tech stocks may be over-extended. Despite high optimism among retail and institutional investors, some view this as a contrarian indicator that the market may be due for a correction.

With the tech rally potentially cooling off, investors are keeping a close eye on how the market will respond in the coming weeks. A shift towards value and cyclical stocks could bring a new dynamic to the market and offer opportunities for those looking beyond the tech boom.