New York — A broadening rally in U.S. stocks is offering an encouraging signal to investors worried about concentration in technology shares, as markets await key jobs data and the Federal Reserve’s expected rate cuts in September. As the market’s fortunes keep rising and falling with big tech stocks such as Nvidia NVDA.O and Apple AAPL.O, investors are also putting money in less-loved value stocks and small caps, which are expected to benefit from lower interest rates. The Fed is expected to kick off a rate-cutting cycle at its monetary policy meeting on Sept. 17-18. Many investors view the broadening trend, which picked up steam last month before faltering during an early August sell-off, as a healthy development in a market rally led by a cluster of giant tech names. Chipmaker Nvidia, which has benefited from bets on artificial intelligence, alone has accounted for roughly a quarter of the S&P 500’s year-to-date gain of 18.4%. “No matter how you slice and dice it you have seen a pretty meaningful broadening out and I think that has legs,” said Liz Ann Sonders, chief investment officer at Charles Schwab. Value stocks are those of companies trading at a discount on metrics like book value or price-to-earnings and include sectors such as financials and industrials. Some investors believe rallies in these sectors and small caps could go further if the Fed cuts borrowing costs while the economy stays healthy. The market’s rotation has recently accelerated, with 61% of stocks in the S&P 500 .SPXoutperforming the index in the past month, compared to 14% outperforming over the past year, Charles Schwab data showed. Meanwhile, the so-called Magnificent Seven group of tech giants — which includes Nvidia, Tesla TSLA.O and Microsoft MSFT.O — have underperformed the other 493 stocks in the S&P 500 by 14 percentage points since the release of a weaker-than-expected U.S. inflation report on July 11, according to an analysis by BofA Global Research. Stocks have also held up after an Nvidia forecast failed to meet lofty investor expectations earlier this week, another sign that investors may be looking beyond tech. The equal weight S&P 500 index, a proxy for the average stock, hit a fresh record [last] week and is up around 10.5% year-to-date, narrowing its performance gap with the S&P 500. “When market breadth is improving, the message is that an increasing number of stocks are rallying on expectations that economic conditions will support earnings growth and profitability,” analysts at Ned David Research wrote. Value stocks that have performed well this year include General Electric GE.N and midstream energy company Targa Resources TRGP.N, which are up 70% and 68%, respectively. The small-cap focused Russell 2000 index, meanwhile, is up 8.5% from its lows of the month, though it has not breached its July peak. The jobs report “tends to be one of the more market moving releases in general, and right now it’s going to get even more attention than normal.” Investors are unlikely to turn their back on tech stocks, particularly if volatility gives them a chance to buy on the cheap, said Jason Alonzo, a portfolio manager with Harbor Capital. Technology stocks are expected to post above-market earnings growth over every quarter through 2025, with third-quarter earnings coming in at 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, particularly the AI theme which is innocent until proven guilty,” Alonzo said.
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