Many investors on Wall Street expect this rotation from Big Tech to small-cap stocks and lagging sectors of the market to continue, but some remain cautious as to whether the “Great Rotation” trade is going to sustain.
Graham said “doldrums” in the manufacturing sector around the globe may indicate “the broadening out of the stock market is not necessarily going to continue.”
China’s manufacturing activity shrank for the third consecutive month in July as demand remained subdued despite recent government stimulus in the world’s second-largest economy. U.S. manufacturing also contracted for a third straight month in June on weak demand, signaling that an ongoing slump in the industrial side of the economy shows no sign of ending.
“That is what’s really holding us back from saying, ‘OK, we’ve got all these cheap stocks out there. Let’s rotate from the quality growth into those….’ We look at commodity prices, we look at the heavy manufacturing economies like China and Germany, and they’re not doing very well,” he said.
Investors should also expect “significant additional volatility” in the stock market with some of the Big Tech names set to report their quarterly earnings results in early August, said Tony Roth, chief investment officer at Wilmington Trust.
Two of the so-called Magnificent Seven names — $Apple(AAPL)$ and $Amazon.com(AMZN)$ are set to report quarterly results on the first day of August, while $NVIDIA Corp(NVDA)$ is expected to report on Aug. 28.
There are a lot of concerns over whether these Big Tech names can continue to hit market expectations and drive earnings, Roth told MarketWatch in a phone interview on Tuesday.
The earnings expectations for tech companies are “very extended” at this point, and there’s “not a lot of room for error” when stocks are trading at such high multiples, he said.
U.S. stocks surged on Wednesday as megacap technology firms staged a rebound following latest earnings updates on artificial intelligence from $Microsoft(MSFT)$ and $Advanced Micro Devices(AMD)$ , and after the Federal Reserve hinted they could cut interest rates in September if economic data continues on its current path.
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