Well, at least some investors had a good month.
While some nasty tumbles caused the S&P 500 and the Nasdaq Composite to fall 0.9% and 5.3% in October, respectively -- the stock selloff might not have been as bad as the headline numbers suggest. In fact, active stockpickers shined last month while the indexes dipped, reflecting just how much of the market's drop can be blamed on tech.
Investors didn't flee stocks entirely. They just rotated to other sectors of the market instead. The equal-weighted S&P 500 gained 2% in the final two weeks of October while the market-cap-weighted index fell 1%. Strategists at Jefferies pointed out in a report Sunday that the market reversing course at the end of the month was "very helpful for active managers," as "the market showed signs of broadening."
According to Jefferies, 64.4% of active managers beat their benchmarks in October. As a result, nearly half (47%) of active fund managers are now outperforming the indexes for the year.
The firm's data also show that much of the recent volatility on Wall Street is due almost entirely to violent moves in tech and other AI-related stocks following earnings from the likes of Alphabet, Amazon.com, Intel and ServiceNow. The rest of the market is actually holding up just fine.
In addition to equal-weighted strategies performing well, small-cap funds topped large-caps, with small value strategies in particular doing well, Jefferies said. More than 90% of active small value funds beat their relevant index in October. Mid-cap growth funds also had a strong October; 83% of the actively managed funds in that category topped their passively run index benchmark.
Bank of America Securities equity and quant strategists said in a report Monday that the big moves in the back half of October were a sign of "extreme rotation beneath the surface." Defensive sectors such as consumer staples, healthcare, and utilities, which are all known for paying sizable dividends, all performed well in October. So did energy stocks, which got a boost from higher oil prices.
As such, the Russell 1000 Value index outperformed its growth counterpart in October by the widest spread since February 2001, according to BofA. The strategists added that 76% of S&P 500 stocks ended the month ahead of the cap-weighted index. That's the highest total ever since BofA began tracking this statistic in 1986.
Can the rotation trend continue? Chris Galipeau, head market strategist at the Franklin Templeton Institute, thinks so. He says a big reason for the market's swings lately is that earnings expectations for the tech sector have been so high. Traders are punishing AI companies for not living up to the proverbial hype, and they are starting to look elsewhere for companies that are also are expected to post solid earnings growth -- and whose shares trade at more attractive valuations than Big Tech.
"We expect the rotation to continue," Galipeau wrote in a Friday note. "The earnings bar is high -- very high. Any minor misstep has led to punishment, which has led to rotation. Rotation isn't a bad thing, and if you are running a diversified equity portfolio, you should be in good shape."
To be sure, the AI trade is far from having run its course. Earnings from Nvidia later this month and the coming initial public offering of Anthropic -- which is likely before Thanksgiving -- could serve as further catalysts to push the Nasdaq and tech stocks even higher.
But the market action of the past few weeks has hopefully reminded investors that not having all your eggs in the AI basket is a good thing.
Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, said in a report Monday that the S&P 500 is only about 3% below its all-time high "despite intense subsurface rotations." That's largely due to "stronger breadth and positive earnings revisions."
Her advice? "Diversified portfolios are working, and we encourage staying the course."
So when the Magnificent Seven stocks plus Broadcom, Micron and Advanced Micro Devices make up about 40.5% of the market value of the S&P 500, it isn't a bad idea for investors to find some fund managers who are looking beyond those 10 companies (as well as newly public SpaceX with its nearly $2 trillion valuation) for good stock ideas.
Not everything is about AI -- even if it seems that way.
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