What's Next for the Big Tech Performance?

Stock bulls have seasonality on their side in the latest rally, but are the conditions set for durable upside as the US economy is forecast to slow?

The All-Index Rally Reveals More Confidence

Big Tech has been the star of this year's stock rise, with FAANG giving way to the "Magnificent Seven" powered by AI. However, investors worried that the lack of breadth in the market made long-term growth uncertain. Last month, the Nasdaq fell back into correction territory precisely thanks to underperformance in tech earnings. But, since then, stocks have rallied. And this time, it's not just the Nasdaq with its overreliance on large tech firms. The S&P 500 is up 9% in the first two weeks of the month, and even the Russell 2000 has scored 10% in the same period.

With such a broad-based rally, investors are likely not as worried about breadth as in the prior iterations. And November is typically the best performing month for stocks, as hedge funds try to position their portfolios for the end of the year coupled with the usual seasonal improved performance ahead of the holidays. Investors attribute the recent upward move in stocks to expectations that the Fed is done with tightening, and lower inflation might mean rate cuts might come sooner than expected. While tech companies could also benefit from lower borrowing costs, the perception is that it helps a much bigger array of stocks, which might mean the start of a broad-based rally.

It's Not All That Optimistic on the Economic Front

While investors might be more optimistic about a lower-rate environment, the troublesome earnings from last quarter haven't disappeared. They also corresponded to a period of extraordinary GDP growth. This might mean company earnings could be even more disappointing if the economy slows down. And, so far, there are indications of that happening. The Fed's GDPNow estimate for the current quarter's GDP is just 2.2% annualised, a far cry from the 5.9% posted last quarter.

In the short term, slower economic performance and falling CPI combine to raise expectations of policy loosening from the Fed. Typically, that helps push stocks higher. But if earnings don't accompany stock prices, valuations become a problem, and the risk of a broader correction grows. As much as 80% of investors now expect the US to avoid a "hard landing", which could contribute to a self-fulfilling prophecy of the market rising. But with interest rates still high, it might finally be the time for Big Tech to take a step back and smaller caps come to the fore. Small caps tend to outperform in periods of higher interest rates as investors see them as more agile, particularly companies with little debt. While the Nasdaq would grow in that scenario, it might take a back seat to the Russell 2000.

Russell 2000 Forms Triple Bottom, Bounces For Now

The small-cap index has formed a triple bottom, meaning the next major level up is the top of the range above $2K. The median between 1640 and the top of the range at 1830 was tested just on Wednesday, with prices above 1710 increasing the chances of an eventual breakout towards 1930. Losing the support could invalidate the bullish thesis, and see Russell 2000 slide towards 1500, the next major support.

Source: SpreadEx / US Russell 2000

Key Takeaways

While big tech stocks have led the Nasdaq rally, the rally is broader this time, with the S&P 500 and Russell 2000 also performing well. November is seasonally a good month for stocks, and investors expect the US economy to avoid a hard landing. Though lower rates in the future may help tech stocks, some analysts think smaller companies with less debt may outperform if interest rates remain high. The Russell 2000 index has formed a triple bottom pattern that hints at a near term rally.