Macro

Big Tech Sees Worst Drop in a Year as Rate Cut Bets Boost Small Caps

Megacap tech stocks drop 4.1%, S&P 500 falls 1% as inflation data fuels rate cut bets for September.

By Athena Xu

7/11, 14:49 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Apple Inc.
Amazon.com, Inc.
D.R. Horton, Inc.
Alphabet Inc.
Lennar Corporation
Meta Platforms, Inc.
Microsoft Corporation
NVIDIA Corporation
PulteGroup, Inc.
Tesla, Inc.
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Key Takeaway

  • The S&P 500 fell 1% as investors rotated out of the "Magnificent 7" tech stocks, causing a Bloomberg index tracking them to drop 4.1%.
  • Despite the overall decline, the Russell 2000 surged 3.2%, and a market-cap stripped version of the S&P 500 rose by 1.2%.
  • Inflation data suggesting potential Fed rate cuts boosted profitless tech stocks by 3.3% and homebuilders like DR Horton Inc., PulteGroup Inc., and Lennar Corp.

Megacap Tech Stocks Retreat

The S&P 500's longest winning streak since November came to an abrupt halt on Thursday, driven by a significant sell-off in megacap tech stocks. The so-called "Magnificent 7" — Apple Inc., Microsoft Corp., Nvidia Corp., Alphabet Inc., Amazon.com Inc., Meta Platforms Inc., and Tesla Inc. — saw their largest collective drop in nearly a year. This rotation was triggered by fresh inflation data, which spurred bets that the Federal Reserve might cut interest rates as soon as September. The S&P 500 fell 1%, despite 400 of its members rallying, while a version of the index that strips out market-cap bias surged 1.2%, its best performance relative to the weighted index since November 2020. The Russell 2000 Index, which includes smaller companies with higher borrowing needs, jumped 3.2%, marking its best performance relative to the S&P 500 since March 2020. A Bloomberg index tracking the Magnificent 7 tumbled as much as 4.1%, its biggest decline since July 2023.

Alexander Morris, CEO of F/m Investments, commented, "Folks use this as the moment to say ‘here’s a good point to reassess whether this is the only place we should be allocated’." He added, "I wouldn’t look at today as forming a trend of anything, but it is underscoring the market was looking for something different, some different trade than just go-long the top-seven tech names or go-long big tech in general."

Inflation Data and Rate Cut Speculation

The catalyst for the market's rotation was the latest consumer price index (CPI) report, which showed inflation cooling to its slowest pace since 2021. This data has strengthened the case for the Federal Reserve to cut interest rates soon, with some market participants now expecting a rate cut as early as September. The Goldman Sachs index of profitless technology stocks, which generally have higher debt burdens, rose 3.3% on the news. Homebuilders like DR Horton Inc., PulteGroup Inc., and Lennar Corp. were among the biggest gainers in the S&P 500, with utilities also seeing a 2% gain, their best day since April.

Michael Feroli at JPMorgan Chase & Co. noted, "Sticky inflation is coming unglued. We now think this paves the way for a first cut in September (previously November), followed by quarterly cuts thereafter." Similarly, Chris Larkin at E*Trade from Morgan Stanley said, "Thursday’s ‘Fed-friendly CPI’ got markets one step closer to a September rate cut."

Small-Cap Stocks and Broader Market Impact

The Russell 2000 Index, which focuses on smaller companies, outperformed significantly, rising 3.5% and marking its best day in 2024. This shift indicates a broader market rally beyond the tech giants. Callie Cox at Ritholtz Wealth Management remarked, "The big tech trade is turning on itself, yet the rest of the market is finally stepping in. The S&P 500 is down today, but this is the best kind of selloff you could hope for if you’re a long-term investor."

Kevin Gordon at Charles Schwab highlighted the benefits for lagging sectors, stating, "No question it’s in response to the fact that the prospect of rate cuts helps companies that have been struggling in the ‘higher for longer environment.’" Steve Sosnick at Interactive Brokers added, "A prolonged selloff in some of the biggest names could pressure the main indices that investors watch — even if the majority of stocks remain initially unscathed."

Street Views

  • Alexander Morris, F/m Investments (Neutral on the market):

    "Folks use this as the moment to say ‘here’s a good point to reassess whether this is the only place we should be allocated’. I wouldn’t look at today as forming a trend of anything, but it is underscoring the market was looking for something different, some different trade than just go-long the top-seven tech names or go-long big tech in general."