The stock market could be undergoing a rotation

Like a sunbather when the timer dings, the stock market seems to be undergoing a rotation.

Through the first half of this year, tech giants carried the market. Since the midpoint, however, the tables have turned. The small-company-focused Russell 2000 has increased more than 9%, compared to ~2% for the S&P 500 and less than 1% for the Nasdaq 100.

What’s driving the rotation? A combo of the current economic situation, hedge funds covering short positions, and the political landscape, JPMorgan Chase Wealth Management writes.

• Traders are currently pricing in a ~94% chance of a rate cut in September. And since smaller companies tend to skew unprofitable (~40% of the small-cap Solactive 2000 checks this box), making them more dependent on financing from capital markets, this would have an outsized impact on small caps relative to large caps.
• Oddsmakers are also predicting a roughly two-thirds chance that a Republican gets elected in November. Smaller companies would likely benefit from the prospect of lower taxes and less regulation.

Yes, but: History isn’t on the side of the little guys. Small-caps historically decline before and after the first interest rate cut, according to Barclays’ analysts.

🗓 We’ll know more soon. Earnings reports should provide a significant amount of market data over the next two weeks, with Coca-Cola, Alphabet, Chipotle, Meta, Microsoft, and Amazon scheduled to report. Russell 2000 companies are expected to see an ~18% rise in Q2 profits, snapping a five-quarter streak of year-over-year declines.