Can Tech Stocks Rebound After a Rough August?

August is off to a bad start. Stocks were down on Monday.

July was a very interesting month for U.S. stock markets, with a shift from tech stocks to small caps.

The Nasdaq 100 index, which measures tech stocks, was down 2% in July. Meanwhile, the Russell 2000 index, which measures small cap stocks, rose 10% during the month. The S&P 500 index rose by 1.1% in July, which is in line with its historical average return.

While small caps and tech stocks were heading in different directions, they were both largely fueled the same factor — great rotation.

The great rotation

Investors may have noticed this term in recent headlines in financial publications and wondered what it meant. It is simply a shift in the market away from the mega-cap growth stocks that have dominated for the past two decades, to small caps, mid caps and value stocks.

Many experts predicted that this would happen this year as the megacaps, mainly technology and AI shares, had become overheated with their valuations soaring unsustainable levels. The AI boom and strong earnings were responsible for much of the growth, but it also caused a feeding frenzy, as more investors piled into the market to take advantage of the higher returns.

Many analysts believed the market would broaden earlier this year. After being beaten all year, we saw small cap stocks outperform large cap stocks in the fourth quarter last year. The trend didn’t last, and large caps continued to dominate the market through the first half.

This led to valuations that were unsustainable, despite strong earnings reports. The large cap tech and growth stock prices have subsequently come down a bit.

Magnificent Seven struggle in July

Five of the Magnificent Seven stocks were down significantly in July. Alphabet, Microsoft and Meta were down by about 6% each in July, while NVIDIA dropped 5% and Amazon fell 3%. Tesla, a laggard and Apple, a underperformer, were the only two companies to have seen gains last month.

In fact, Nasdaq 100 experienced a correction over the past month, falling from 20,675 on 10 July to 18,441 by 2 August. This would be considered a correction because it represents a 11% drop.

NVIDIA’s stock has fallen even more, by about 29%, since its July 10, post-stock split peak of 134.

The Nasdaq 100 opened Monday down 900 points or 5%.

Can tech stocks rebound in August?

July is usually a good month for the markets, as this is when the majority of major companies release their earnings for the quarter ending June 30.

August is one of the worst times for stocks. The S&P 500 is flat in August historically. This is one of just four months in history that has had flat or negative returns.

It’s because it’s the second month in earnings season and most big companies have already reported their earnings. Also, trading tends to slow down when the economy slows down, as people are on holiday.

This August, however, seems to be different. There are signs of a slowing down economy and renewed concerns of a possible recession. Perhaps higher interest rates have finally taken their toll on the growth. Last week, unemployment increased as fewer jobs than expected were created. The manufacturing index was also lower than expected.

Will the correction continue?

This correction was long overdue and should not come as a surprise. Despite the fact that there were no major catalysts for August and many large cap stocks are still overvalued don’t expect to see things rebound too quickly.

This correction increases the likelihood of a rate reduction in September. It may even be a 50-point cut. There could be multiple cuts before the year ends.

The market is still in a correction phase, so a turnaround in August does not seem likely. Keep an eye out for potential opportunities in September and Q4, when rates are likely to begin to fall.

This site is intended for entertainment only and does NOT offer financial advice.

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