2 reasons why small caps are outperforming Big Tech
Small caps outperformed Big Tech in the last month as the Russell 2000 (^RUT) rose over 10%. Portfolio Wealth Advisors president & CIO Lee Munson joins Wealth! to break down the movement and the disappointment in Big Tech earnings.
Munson points to two reasons behind the recent growth of small caps. First, he explains that small caps generally perform well at the beginning of an expansionary cycle as opposed to a late cycle. "I think what people have to remember is that we have this presumption that we're going to start slowing down. We have this presumption that the Fed is going to have to cut rates. Why are they going to have to cut rates? Because we don't want to cause a recession. So the market's looking 6 to 12 months out from today... And so people are starting to load up on what they think is going to be this huge expansion going into next year, and the election and the presidential candidates have a lot to do with that," he says.
The second reason boils down to the short-term prospects of AI: "People are starting to get the message that while I love ChatGPT, I'm on every single moment of my life, but it's going to take time to really make the killer app. The thing that's going to cause Apple (AAPL) to have to sell a whole new line of stuff that's going to cause Microsoft (MSFT) to have this whole new software to sell people, and that it's not going to happen in the next six months. And so people are starting looking at profitability, they're starting to question it."
As second quarter Big Tech earnings roll in, investors have been largely disappointed. Munson explains that investors want to see immediate returns on these companies' capital investments, which poses an issue as the AI trade takes longer to materialize. He believes there isn't a sell-off of Big Tech, but rather, there is more of a "buyer strike." With the Federal Reserve eyeing a September interest rate cut, he believes that small-cap stocks and "all the other stocks that are not Mag Seven" are poised to benefit as their debt loads will decrease.
Be sure to check out Lee Munson's interview with Jared Blikre on Stocks in Translation here.
For more expert insight and the latest market action, click here to watch this full episode of Wealth!
This post was written by Melanie Riehl