Tech Rally Grinds to a Halt as Investors Rotate Into Small-Cap Stocks

The S&P 500’s recent rally to record highs ground to a halt Thursday as tech stocks weighed on the index.

Artificial intelligence (AI) darling Nvidia (NVDA), Microsoft (MSFT), Apple (AAPL), and other large-cap tech stocks tumbled, as investors rotated into small caps amid hopes they could get a boost from Federal Reserve rate cuts.

Small cap stocks surged, with the Russell 2000 up more than 3% after the Labor Department’s latest inflation report showed consumer prices unexpectedly fell in June, raising hopes the Federal Reserve will have the confidence to cut interest rates this year. 

Could It Be Small Caps’ Time To Shine?

Rates cuts by the Fed would lower the costs of taking on debt for borrowers, and small-cap stocks could potentially stand to get a bigger boost from Fed rate cuts as many small and mid-caps companies have more floating debt than their larger counterparts.

With inflation cooling, markets are currently pricing in an over 90% chance of a rate cut in September, according to the CME Group’s FedWatch tool.

Bank of America analysts also suggested earlier this week that second-quarter earnings could show growth finally starting to broaden beyond the biggest tech stocks, which dominated earnings gains and returns for the index so far this year. 

The Magnificent 7 alone—a group that includes Microsoft, Apple, Nvidia, Amazon (AMZN), Meta (META), Alphabet (GOOGL), and Tesla (TSLA)—accounted for over half of the S&P 500’s returns in the first half of the year.