Volatility returned this week with a noticeable shift from AI-related tech stocks, the post-pandemic winners, to smaller-cap and value companies. This marked the third best week for small cap outperformance against the S&P 500 since 2000.
The exact cause of this rotation is often difficult to pinpoint, with true reasons typically revealed in hindsight. However, the significant outperformance of mega-cap tech stocks, heavy global fund manager investments in the tech sector, and high expectations for these companies suggested that a slowdown or correction was likely during the summer.
As market sentiment peaked for these companies, any further news could only be negative, prompting a swift adjustment in market outlooks for growth stocks this year.
Political events in the US have also captured mainstream attention. The increasing possibility of a Trump ‘clean sweep’ with Republican control of the Presidency, House, and Senate, coupled with news that Trump would keep Federal Reserve Chairman Powell if elected, has generated market optimism for tax and rate cuts, benefiting smaller companies and debt-heavy cyclical and industrial sectors.
In a strategic political move, Trump chose Senator JD Vance as his running mate, aiming to secure votes in key swing states in the industrial Midwest. Elon Musk praised the decision on his platform X, calling it a ‘great choice’ and predicting a victorious outcome.
The week concluded with President Joe Biden announcing his withdrawal from the election race amid mounting internal party pressure. Kamala Harris is the likely Democratic candidate to challenge Trump, with the winner to be decided in early November.
Adding to market turbulence was the biggest IT outage in history, causing widespread disruption globally. This incident, triggered by a minor security update from CrowdStrike to the Microsoft operating system, affected numerous industries including airlines, banks, broadcasters, and healthcare providers across the US, Europe, Australia, Japan, and India.
CrowdStrike, a leading provider of endpoint security software, found itself at the centre of this crisis, highlighting how small technical changes can have massive impacts.
The tech sector faced further challenges as semiconductor companies were heavily sold off following reports that the Biden administration might impose strict export restrictions if companies like Tokyo Electron and ASML Holding continued supplying advanced technologies to China.
In other corporate news, Swatch Group, the world’s largest watchmaker, reported a significant drop in first-half sales and earnings due to weaker demand in China. European luxury brand Hugo Boss also saw its stock plummet after reducing its sales forecast, citing difficulties in the Chinese market.
Looking ahead, investors are keenly awaiting the US government’s initial estimate of second-quarter GDP, expected to show an economic acceleration to +2.7%. Corporate earnings reports, particularly from major players like Alphabet and Tesla, will also be closely watched to gauge the short-term direction of asset prices.
Last week saw significant market shifts and political developments, with small caps outperforming amidst a backdrop of volatility and uncertainty.
TEAM plc (LON:TEAM) is building a new wealth, asset management and complementary financial services group. With a focus on the UK, Crown Dependencies and International Finance Centres, the strategy is to build local businesses of scale around TEAM’s core skill of providing investment management services.
