Market Insights

Investors are pivoting away from megacaps, positioning for the Federal Reserve to cut interest rates.

The S&P 500 just finished a strange move. The index declined for six straight sessions between Thursday, August 14, and Thursday, August 21, its longest losing streak of the year. It then erased all those losses in a single big rally on Friday, ending last week up 0.3 percent.

Fed Chairman Jerome Powell triggered the move with comments in Jackson Hole, Wyoming.

“Downside risks to employment are rising,” he said at the annual symposium. “With policy in restrictive territory … the shifting balance of risks may warrant adjusting our policy stance,” toward lower interest rates.

Reassured the central bank is more willing to support the economy, investors scrambled into stocks that could benefit. Many of them underperformed in the last year, resulting in a small value rotation:

• Small caps: The Russell 2000 ended last week at its highest level since early December.
• Banks: The KBW Nasdaq Bank Index had a record weekly closing high. Lower rates can spur lending volumes and boost the value of balance sheet assets.
• Energy was the strongest sector last week. It’s economically sensitive and has the lowest earnings multiple of any major sector. Servicers like Schlumberger (SLB) and Halliburton (HAL) were especially active.
• Real-estate investment trusts and homebuilders climbed because they have a natural sensitivity to borrowing costs.
• Solar energy: Another potential value play after four years of steady declines.

Megacaps Struggle

All told, 82 percent of the S&P 500’s members rose last week. That’s a surprisingly large proportion given the index’s gain of just 0.3 percent.

The reason is that megacap growth stocks struggled. TradeStation data showed that, of the nine companies worth at least $1 trillion, only three rose last week: Tesla (TSLA), Berkshire Hathaway (BRK.B) and Alphabet (GOOGL).

Other major AI names fell, including Broadcom (AVGO), Microsoft (MSFT) and Nvidia (NVDA). Palantir Technologies (PLTR), a smaller company closely associated with AI, had its biggest weekly drop since early April.

OpenAI CEO Sam Altman may have prompted some of the selling by suggesting AI stocks were in a bubble. Advanced Micro Devices (AMD), Dell Technologies (DELL) and Oracle (ORCL) declined as well.

The selling made technology the only sector to fall more than 1 percent last week. The Nasdaq-100 was also the only major index to close in the red.

The Dow Jones Industrial Average, on the other hand, was the only major index to close at a new all-time high. That weakness in the Nasdaq and strength in the Dow additionally highlight last week’s shift from growth stocks to value stocks.

Weak Dollar

Powell’s dovish messaging also caused the U.S. dollar to lose value for the third straight week. That supported precious-metal plays like gold and silver miners, along with global stocks. China and Mexico were especially strong.

Dayforce (DAY) was the biggest gainer in the S&P 500 last week after accepting a $12 billion takeover by Thoma Bravo. Paramount Skydance (PSKY) surged on optimism about profit-boosting job cuts after its recent merger.

Analog Devices (ADI) didn’t make the top five, but it climbed 8.9 percent on strong quarterly results.

Intuit (INTU), on the other hand, fell after beating estimates. A bigger issue could be that investors seem to be selling high-multiple software companies. (See this recent article for more.)

Charting the Market

The S&P 500 remains in an uptrend, with few apparently negative signals.

Friday’s 1.5 percent rally was the biggest one-day gain since May 27. The bounce occurred at both the 21-day exponential moving average and a 50 percent retracement of the move between August 1 and August 15. Those signals potentially confirm the bullish direction.

The Advance/Decline (A/D) line also made a new high, reflecting positive breadth.

Cboe’s Volatility Index (VIX) ended last week at its lowest level since early December. That may indicate limited selling pressures.

SPDR S&P 500 ETF (SPY), daily chart, with select patterns and indicators.

The Week Ahead

This week features earnings by the market’s biggest company, Nvidia (NVDA), and some noteworthy economic reports.

New home sales are due this morning.

Tomorrow brings durable-goods orders and consumer confidence. MongoDB (MDB) and Okta (OKTA) announce results in the afternoon.

Crude-oil inventories are on Wednesday morning. NVDA reports in the postmarket, along with CrowdStrike (CRWD), HP (HPQ) and Snowflake (SNOW).

Thursday features the first revision of last quarter’s gross domestic product (GDP), plus initial jobless claims. Best Buy (BBY), Dollar General (DG), DELL and Marvell Technology (MRVL) announce earnings.

The big item on Friday is the personal consumption expenditures (PCE) inflation report. Personal income and spending are also part of the report.

That’s followed by a three-day weekend because of Labor Day. Trading will resume on Tuesday, September 2.

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