On Thursday, the U.S. stock market once again exhibited the sector rotation trend seen since the beginning of the year, with funds shifting from major technology stocks to areas that underperformed last year. The S&P 500 index closed largely flat, while the tech-heavy Nasdaq 100 index fell by 0.5%. In contrast, the Dow Jones Industrial Average rose by 0.6%, and small-cap stocks staged a notable rebound, with the Russell 2000 index gaining 1.1%.
Dave Lutz of JonesTrading analyzed that at the start of the year, funds are chasing directions with greater appreciation potential. Faced with high valuations in technology stocks and concerns about potential bubbles in the artificial intelligence sector, small-cap stocks have become a highly attractive investment area, especially considering the potential easing policies the Federal Reserve may introduce in the future. This trend is reflected in the equal-weighted S&P 500 index, which is poised to outperform the market-cap-weighted index for the third consecutive month. If this continues until the end of the month, it will mark the longest streak of outperformance in three years.
Meanwhile, President Trump’s remarks about increasing the military budget have boosted the defense sector. After Trump hinted at significantly raising defense spending, shares of companies such as Lockheed Martin (LMT), Northrop Grumman (NOC), and Kratos Defense & Security Solutions (KTOS) saw notable gains. Hedge fund founder Thomas Thornton pointed out that Trump’s active comments on social media are impacting related sectors: his proposal regarding institutional home purchases led to weakness in real estate-related stocks, while his remarks on increasing the defense budget boosted the defense sector.
Amid concerns that the AI-driven rally may slow down, Wall Street strategists are searching for new catalysts to drive the market higher. Goldman Sachs has shifted its focus to sectors benefiting from the growth in middle-class consumption, such as healthcare providers, materials producers, and consumer staples manufacturers. However, another team at the bank warned that current stock valuations are too high, and if economic growth concerns intensify in the second half of the year, the market will face significant risks.
In the field of artificial intelligence, reports indicate that China plans to approve the import of Nvidia’s (NVDA) H20 chip as early as this quarter, which could potentially reopen the door to a critical market for the company.
In terms of individual stocks, Alphabet (GOOGL) saw its share price rise due to an upgraded rating. On the other hand, Soho House & Co. (SHCO) fell after disclosing that the company is facing a funding shortfall, while Jefferies (JEF) closed lower as its fourth-quarter earnings per share fell short of analyst expectations. Overall, the market exhibits clear sector rotation characteristics, with investors adjusting their portfolios based on valuations, policy expectations, and industry dynamics.
