U.S. markets tumbled as investors rotated money out of technology stocks and into small-caps and housing equities as expectations grow that interest rates will be lowered in coming months.
The S&P 500 and Nasdaq Composite indices each declined about 1% on July 11 as investors traded out of the mega-cap technology stocks that have powered a sustained rally since last November.
All of the so-called “Magnificent 7” stocks — Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), Alphabet (GOOG/GOOGL), Amazon (AMZN) Meta Platforms (META) and Tesla (TSLA) saw their share prices fall sharply during the trading session.
Nvidia, which has been the top performer of the group, saw its stock fall by 5% while Tesla’s share price declined 8%.
The rotation out of tech stocks was prompted by inflation data that showed consumer prices in June rose at an annualized 3%, the slowest rate of increase in three years.
The cooler inflation reading has raised expectations that the U.S. Federal Reserve will lower interest rates at its meeting this September.
Futures traders are now placing the odds of an interest rate cut in September at more than 90%. Over the past 12 months, interest rates in the U.S. have been at their highest level in 15 years.
Consequently, traders and investors were quick to move money out of technology stocks and into sectors that perform well when interest rates are lower such as housing and stocks with small market capitalizations.
The Russell 2000 Index, whose members tend to have lower credit ratings and higher borrowing costs, rose by 3.2%, its best performance relative to the S&P 500 since March 2020.
At the same time, the Magnificent 7 stocks as a group fell 4.1%, their biggest decline since July 2023.
Prior to this rotation occurring, the technology-laden Nasdaq index had risen nearly 25% this year, adding more than $6 trillion U.S. of market value.
In addition to small-cap stocks, shares of U.S. homebuilders such as DR Horton (DHI), PulteGroup (PHM) and Lennar (LEN) were among the big gainers on the day, with each of those stocks rising more than 6%.
