There are some emerging signs that a slight rotation may have begun in US markets, where a narrow concentration on mega cap technology stocks has been virtually the sole driver of gains this year.
In addition, the stellar rise of tech and AI-related stocks in particular inevitably gets to the stage where investors pause for breath and recalculate valuation levels. Over recent days the more traditional Dow Jones index has been the subject of buying interest at the expense of the more tech exposed S&P500 and Nasdaq indices, as investors seek alternatives such as financials and utilities, and more broadly in value stocks which have been left behind by the tech surge.
After two weaker trading sessions, market darling Nvidia (NASDAQ:NVDA) fell a further 6.7% while other chip stocks such as Broadcom (NASDAQ:AVGO) and Qualcomm (NASDAQ:QCOM) fell between 3% and 6%. While it is far too early to call an end to the current run, such minor corrections are generally seen as healthy, while the expected downward direction of travel for interest rates provides a comforting backdrop as companies more broadly are comfortable to borrow to grow their businesses.
Indeed, despite the Federal Reserve’s latest projection of just one rate cut this year, likely in December, the consensus remains that there could yet be two cuts, beginning in September. As such, economic data will be scrutinised for emerging cracks in the economy to support this case, while the impending second-quarter reporting season will provide another perspective from companies on the ground, as will their guidance comments. In the meantime, any signs of a rotation has yet to impact the general momentum of tech stocks, with the Nasdaq and S&P500 having risen by 16.6% and 14.2% in the year to date respectively, while the Dow Jones is now up by 4.6%.
There were echoes of the US experience in Asian markets overnight, where in Japan for example there was evidence of some switching out of the tech sector into value stocks such as financials, which were also boosted by the possibility of monetary tightening from the central bank. in addition, a producer price release showed an increase of 2.5% for May, a slight decline from April’s 2.7%, while in the background the weakness of the yen against the US dollar continues to keep the authorities on intervention alert.
For China, there were more pointers to a fragile economic recovery, with reports of a slowdown in e-commerce sales for the first time during the recent national shopping festival. Consumer sentiment has been in question for some considerable months now, hampered by wider growth concerns and high youth unemployment, while the parlous state of the property sector has added jitters which have resulted in something of an investment exodus from the region.
UK markets largely trod water on the open, being largely exempt from the tech story elsewhere, with the largest movers going in opposite directions. Rolls-Royce (LON:RR) shares, which have risen by more than 200% over the last year on a revitalised business model and wide investor interest, slipped by more than 3% as a read across from a profit downgrade from Airbus and despite a broker upgrade. The news hit Melrose Industries (LON:MRON) even harder, with a markdown of almost 7%, while on the upside two separate broker upgrades lifted insurer Admiral by over 2%, while there was also some activity in BP (LON:BP) and Shell (LON:SHEL) shares on an oil price which remains up by 12% so far this year, largely on geopolitical concerns.
The FTSE100 is now up by 7.2% in the year to date as the end of the half-year approaches, in what has been an interesting six months as investors have cautiously sought value as an alternative to big tech in the US, while an average dividend yield of 3.6% has been an additional attraction. For the market as a whole, particularly around the FTSE 250, a resurgence in M&A activity based on cheaply regarded UK valuations has also enabled a rise of 4% for the more junior index. However, at the same time an exodus of listings mainly in the direction of the US has heightened concerns around the UK as an investment destination. The rumoured £50 billion flotation of Chinese fast-fashion company Shein in the UK would be a boon to domestic fortunes, even though the jury is currently out on whether a company which has had a tendency to court controversy is an ideal turning point.