How Much Longer Will the Trend of Narrow Tech Stock Strength Continue?
The current trend of narrow tech stock strength has been a topic of discussion in the market lately. While a few large-cap technology names have been performing exceptionally well, the majority of stocks have been struggling. This has created an illusion of broad market strength due to the capitalization-weighted indexes. However, the market breadth has been negative, and secondary stocks have been lagging behind.
Despite the recognition of this narrowness by the business media, there are still constant headlines about how bullish the market has been. The significant jumps in some indexes earlier in the year have convinced many individuals that this strong uptrend will continue. However, the bulls have been hoping for a broader market rally, with the big-cap AI leaders pulling up the rest of the stocks. Although there have been sporadic signs of this happening, such as the Russell 2000 occasionally outperforming, it has been inconsistent. Only 135 stocks managed to hit new 12-month highs, despite the strength of the index.
Thursday morning brings a slight shifting in the trend. Most of the leading big-cap technology names are indicated to open lower, except for Meta Platforms (META), which is gapping up after introducing its Twitter clone called Threads. This news has prompted KeyBanc to increase its price target on Meta from $280 to $335, while Morgan Stanley has increased its price target on Microsoft (MSFT) to $415 from $335. These updates are contributing to the sustained performance of these large-cap tech names.
Wednesday morning showcased weakness in the big-cap technology stocks at the open, but dip buyers quickly jumped in, resulting in relative strength in these names. On the other hand, small-caps had a dismal day and closed weak. Cash from these small-caps rotated into the perceived safety of the big names, despite their increasingly expensive valuations.
There will be a significant test on Thursday, as all the leading big-cap stocks, except for Meta, are expected to open lower. Additionally, there will be important economic data released, including ADP employment, initial claims, and job openings, building anticipation for the jobs report on Friday.
The release of the minutes from the Federal Reserve meeting in June has caused some market pressure due to a perceived hawkish tone. If the jobs report is strong, it may further fuel speculation about the Fed’s stance on monetary policy.
While the big-cap technology trend has been incredibly strong, it is inevitable that a shift will occur sooner or later. The gap between this small group of stocks and the rest of the market has reached extreme levels and will likely need to reset. It remains to be seen how this narrowing trend will evolve and how long it will persist.
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