U.S. stocks survived the "summer storm", but this time it was all thanks to the "S&P 493"

As the "stock market sell-off" in the summer gradually subsides, the US stock market has regained most of its losses. Apart from the "Tech Seven Giants," the other 493 component stocks in the S&P 500 index have shown resilience in the market turmoil, successfully driving the S&P 500 index to recover.

From real estate to utilities, and then to essential consumer goods, stocks in these traditional industries are becoming the new favorites in the market.

Is the Era of the "Seven Giants" Coming to an End?

Over the past two years, benefiting from strong profit growth and extensive deployment in the field of artificial intelligence, tech giants such as Nvidia and Microsoft have been the main driving force behind the stock market's rise.

However, with concerns about slowing economic growth and the Federal Reserve about to start an interest rate cut cycle, investors are shifting towards industries like real estate, utilities, and essential consumer goods.

Since the S&P 500 index peaked on July 16, the so-called "Big Seven Tech Stocks" - Nvidia, Microsoft, Apple, Google, Amazon, Meta Platforms, and Tesla - have mostly underperformed, with Bloomberg's Big Seven Tech Stocks Index falling by 5.3%.

During the same period, the S&P 500 index fell by less than 1%, mainly dragged down by the heavier-weighted tech stocks, while the rise of companies outside the "Seven Giants" offset most of the decline.

The Rise of the "S&P 493"

In this context, industries that are usually less active have performed well, with both real estate and utilities rising by 11% since July 16.

Bloomberg Intelligence stock strategist Michael Caspe said:

"Investors like to focus on companies that have turned their profits from decline to growth. This to some extent has led them away from tech stocks and towards the other 493 stocks that were once abandoned."

Analysis indicates that market expectations of loose monetary policy have fueled this shift. Currently, the massive spending by tech giants on AI computing devices has raised concerns in the market about their profit margins, especially as there is little evidence so far that this spending can bring sufficient revenue growth. Meanwhile, the profit outlook for other industries is improving.

For example, after seven consecutive quarters of profit decline, the healthcare industry saw a 16% profit growth in the second quarter. Analysts expect this growth to continue until the end of this year, with profit growth reaching 45% in the first quarter of 2025.

Still Bullish on Tech Stocks

Nevertheless, some analysts believe that whether this market rotation is just a passing trend or a long-term trend will likely depend on the direction of the economy. The Federal Reserve's policy direction this week will provide important clues to the market, as there are still differing views among traders on whether the central bank will cut rates by 25 basis points or 50 basis points.

Adam Grossman, Chief Investment Officer for Global Equities at Riverfront Investment Group, believes that the stocks that "will start to show leadership" are those that "will benefit from higher economic growth and lower rates." Despite this, large-cap tech stocks still constitute the largest allocation in their portfolios.

Keith Lerner, Co-Chief Investment Officer at Truist Advisory Services, believes that if there is uncertainty, investors may continue to pay a premium for growth prospects. Defensive sectors will continue to perform well if the economy continues to slow down. However, tech stocks tend to perform well in both slowing and stable environments.

Data shows that profits of tech giants remain strong, but the growth rate has slowed compared to the past few years. The rapid growth back then was fueled by stable sales growth and a focus on efficiency, which also led to hundreds of thousands of job cuts across the industry.

The profit growth of the "Big Seven Tech Stocks" in the second quarter was 36%, down from over 50% in the previous three quarters. According to Bloomberg Intelligence, profit growth in the next four quarters is expected to be between 17% and 20%.

Although the sluggish economy has lowered the price-to-earnings ratios of many tech stocks, they still remain relatively high compared to the average of the past decade. For example, Microsoft's P/E ratio is 32 times, down from the peak of 35 times in July, but still higher than the average of 25 times over the past decade.

Michael Mullaney, Global Market Research Director at Boston Partners, also believes that while the prosperity of AI-related stocks like NVIDIA has sparked comparisons to the dot-com bubble era, this does not mean that tech stocks will not continue to perform well:

"Lower valuations of the other 493 companies may attract some buyers, but that doesn't mean investors should completely abandon tech stocks. These companies are making a lot of money, which is very different from the situation in 2000."