Market Rotation Should Begin A New Leg Up, And Not Just For Small-Caps

[Zacks | Our Research. Your Success.] WeekendWisdom Tactics that Work in Good Markets and Bad [Kevin Matras - Editor] Market Rotation Should Begin A New Leg Up, And Not Just For Small-Caps By: Kevin Matras July 20, 2024 --------------------------------------------------------------- The long-awaited market rotation is here, and it has catapulted the small-caps and mid-caps sharply higher over the last 2 weeks. It even sent the large-cap Dow to new all-time highs. Until recently, large-cap tech/AI dominated stocks (the largest ones often referred to as the Magnificent 7), have been the key driver of the rally. And it sent the market-weighted S&P 500 and tech-heavy Nasdaq soaring. In fact, in the first half of the year, the S&P was up 14.5%, with the Nasdaq up 18.1%, all while the neglected small-cap Russell 2000 only added 1.02%. Mid-caps also lagged, gaining just 5.34%. And even the Dow trailed with only 3.79%. And while we're at it, the broader S&P itself has lagged the crowded Magnificent 7 trade. The Magnificent 7 (or Mag 7) is comprised of 7 of the largest stocks by market-cap, which are: Apple, Microsoft, NVIDIA, Alphabet (i.e. Google), Amazon, Meta, and Tesla (even though TSLA is down for the year). As you know, the S&P is a weighted index, so the largest stocks have their gains amplified due to their higher weighting. And those 7 stocks had an oversized impact on the market's returns. In fact, for the first 6 months of the year, the Magnificent 7 made up 59.5% (just under 60%) of the S&P's gains. To put this into perspective, the full market-weighted S&P was up 14.5% in the first half. But if you take out the Mag 7, the S&P would've only been up 5.86%. Pretty amazing. You can also see the over-influence of those stocks (and other large-caps) on the market-weighted index, when you compare it to the equal-weighted S&P. There, each stock is weighted the same as the others, large and small alike. And for the first 6 months of the year, the equal-weighted index was up just 4.10% to the market-weighted 14.5%. Stark difference. But the current market rotation should allow for a big game of catch up for the ignored small-caps, and even other well-deserving mid-caps and large-caps. Market rotation is just what it sounds like – investors rotate out of some stocks and into others. And since large-cap tech/AI dominated stocks have been the biggest movers, that would suggest a rotation out of those stocks, and into other stocks worthy of investor dollars that have been largely ignored. That distinction was on full display two weeks ago on Thursday, when the market rotation began, and the S&P 500 fell by -0.88% and the Nasdaq by -1.95%, while the small-cap Russell 2000 gained 3.57%. In fact, that whole week was pretty revealing with the S&P and Nasdaq each up just a fraction of a percent, while the Russell 2000 jumped 6%! There's still a huge difference in performance for the year with the S&P and Nasdaq up 15.4% and 18.1%, while the Russell is now up 7.76%. But that performance gap is expected to narrow significantly as those overlooked and ignored stocks are rotated into and rise. Continued . . . [Saturday Deadline: Claim Your Free Copy of Finding #1 Stocks]( One single idea changed Kevin Matras' life as an investor, allowing him to tap into the greatest force driving stock prices. In Finding #1 Stocks, Kevin explains his top stock-picking secrets and strategies based on this powerful concept. In 2023 – while the market gained +26.2% – these strategies produced gains up to +62.6%.¹ You can take full advantage of them without attending a single class or seminar, in a lot less time than you think. Opportunity ends midnight Saturday, July 20. [Get your free book now »]( Breadth Expansion I don't see this market rotation, however, as a wholesale dumping of large-caps or the AI trade. I do see a lessening of the over-concentration in those names. Especially after the monster-gains they've seen. But that trade has worked so well for a reason -- and it's because the AI boom is real, and is supported by real earnings, and real growth potential. And AI is shaping up to be just as transformative, if not more so, than the personal computer, the internet, and the mobile phone. And it's expected to touch virtually every industry in some way shape or form, as well as impact ordinary lives. So, I don't see investors shunning those stocks completely. Not by a long shot. Nor should they, as it would be a terrible long-term mistake in my opinion, as the AI boom is a multi-year phenomenon. Instead, this rotation is more like a bull market breadth expansion. True, some money may be coming out of large-caps in favor of smaller names, and some money may be coming out of big-tech in favor of other industries. But the point is, it looks like the bull market is entering a new phase -- potentially moving away from the overly-crowded, overly-concentrated big-tech/AI trade, to including many more stocks and many more industries. It should lift the small-cap index, but also the mid-cap index, the Dow, and even continue to lift the Nasdaq and the S&P 500 as the other stocks in those indexes will get a chance to benefit more broadly as investor dollars start giving those more attention. And that's very bullish for the market. In addition, there are plenty of other reasons why the rest of the year is shaping up to be a historic one. Cyclical Trends And Other Statistics Benefitting The Market The 4-year Presidential Cycle shows that year 4 (that's this year), is the second-best year of all four years (second only to year 3 (last year, when the S&P gained 24.2%), which is the best year of all 4 years). This a powerful recurring cycle. And historically, it's amazing to see how favorable this is for investors. Additionally, even though we are in the midst of a strong bull market (last couple of days notwithstanding), which has seen a series of new highs after new highs, the market prior to that had gone 24 long months without setting a new high even once. And it was only in January of this year that we finally eclipsed the previous all-time highs from January 2022. I point this out because history shows in the previous 14 times when the S&P has gone at least a full year without a new high, and then finally made one – a year later it was higher in 13 out of those 14 times, and up nearly 15% on average. Another interesting statistic, which points back to the big gains we saw in November of last year, bodes well for more gains to follow this year. Once again, history shows that when the S&P was up by more than 8% in a single month (November 2023 was up by 8.91%), (this has happened 30 times since 1950), a year later the index was higher in 27 out of those 30 times (that's 90% of the time), with an average return of 15.8%. Pretty compelling stats. It also sets a bullish tone for all of the other factors working in the market's favor this year. Inflation Continues To Decline, Interest Rate Cuts Expected Soon The other week's better-than-expected Consumer Price Index (CPI) inflation report is what set the market rotation in motion. Headline inflation actually fell last month by -0.1% m/m vs. the previous month's 0.0%. The y/y rate came in at 3.0% vs. the previous month's 3.3%. The core rate (ex-food & energy) was up 0.1% m/m vs. the previous month's 0.2%, while the y/y rate was at 3.3% vs. the previous month's 3.4% and views for 3.5%. Not only did it show inflation continuing to ease, but it fell even more than expected, with some now speculating that the Fed might even have room to cut interest rates 2 times this year rather than just the 1 they currently foresee. While progress on inflation had slowed earlier in the year, the last couple of months of reports have shown that inflation is back on the decline. So much so that Fed Chair Jerome Powell, in his recent Semiannual Monetary Policy testimony to Congress, said the economy has made "considerable progress" on inflation, while maintaining a "strong, but not overheated" job market. And last week, after discussing when the Fed might finally begin cutting rates, he acknowledged that "if you wait until inflation gets all the way down to 2%, you've probably waited too long, because the tightening that you're doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%." He reiterated the Fed's position that they'd like to see more confidence that inflation, indeed, is on a sustainable path toward 2%. And followed that up by saying, "what increases that confidence…is more good inflation data, and lately we have been getting some of that." While nobody is expecting a rate cut when the Fed meets on July 30-31, the odds are increasing that we could see the first cut in September, leaving November and December as options as well. Lower interest rates are likely to have a bigger impact on smaller-cap companies, and help increase profit margins. And since the market is forward-looking, traders are not waiting for the first rate cut to actually take place. Simply 'knowing' that cuts are right around the corner has ushered in a sense of urgency to get positioned in the biggest rate cut beneficiaries, and to get ready for the next leg up in the broader market as well. I should also note with rate cuts looming, you're also likely to see a rotation out of money market funds too, and into a wider selection of stocks as well. The Outlook Is For Growth Just the other month, the International Monetary Fund (IMF) raised their global growth forecast to 3.2%, up from January's forecast of 3.1%. They also gave the U.S. the biggest upside revision, upping their growth forecast to 2.7% from their previous estimate of 2.1%. The Eurozone saw a slight downward revision, but is still expected to grow by 0.8% from the previously expected 0.9%, while China is expected to grow by 4.6%, and India is expected to increase by 6.8%. But the IMF specifically singled out the U.S. as being a major driver of global growth this year. And Fed Chair, Jerome Powell, concurred with the strong assessment for the U.S. economy, saying "more recent data shows solid growth and continued strength in the labor market." While some may suggest that the strength in the U.S. economy is at odds with easing inflation, nobody is making a case for a recession anytime soon. And a growing economy goes hand in hand with a bull market. Moreover, personal incomes are hovering near all-time highs. An important point when you consider that 70% of our GDP is driven by consumer spending. And that helps fuel corporate profits. Earnings Season Earnings season is always an exciting time since stocks typically go up during earnings season. And another earnings season is upon us, once again. It officially kicked off just last week. Stocks soared last earnings season. And I'm expecting them to do it again, as earnings and sales estimates are on the rise. Q1'24 earnings were up 7.1% and sales up 4.4%. This earnings season (Q2'24) is expected to show earnings up 8.7% and sales up 4.8%. And the excitement should continue in the quarters to follow with Q3'24 expected to show earnings up 6.4% and sales up 4.8%; Q4'24 expected to show earnings up 12.2% and sales up 5.5%; and Q1'25 expected to show earnings up 13.8% and sales up 5.7%. The earnings picture is one of improvement, and another bullish indicator underpinning the market. Stocks Are Undervalued Let's also not forget that valuations are down. While the P/E ratio for the S&P has risen from their lows, they are still down sharply from 2021's peak, and are below where they were the last time stocks were anywhere near this level. And that makes stocks a bargain. Then when you factor in the increasing earnings estimates, stocks look even more undervalued. Do What Works So how do you fully take advantage of the market right now? By implementing tried and true methods that work to find the best stocks. For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 29 of the last 36 years (an 81% win ratio) with an average annual return of more than 24% per year? That's more than 2 x the S&P, including 4 bear markets and 4 recessions. And consistently beating the market year after year can add up to a lot more than just two times the returns. Did you also know that stocks in the top 50% of Zacks Ranked Industries outperform those in the bottom 50% by a factor of 2 to 1? There's a reason why they say that half of a stock's price movement can be attributed to the group that it's in. Because it's true! Those two things will give any investor a huge probability of success and put you well on your way to beating the market. But you're not there yet, as those two items alone will only narrow down a field of 10,000 stocks to the top 100 or so. Way too many to trade at once. So, the next step is to get that list down to the best 5-10 stocks that you can buy. Proven Profitable Strategies Picking the best stocks is a lot easier when there's a proven, profitable method to do it. And by concentrating on what has proven to work in the past, you'll have a better idea as to what your probability of success will be now and in the future. Of course, this won't preclude you from ever having another losing trade. But if your stock picking strategy picks winners more often than losers, you can feel confident that your next trade will have a high probability of success. Here are a few of my favorite strategies that have regularly crushed the market year after year. New Highs: Studies have shown that stocks making new highs have a tendency of making even higher highs. And this strategy proves it. The alignment of positive price action and strong fundamentals creates all the necessary conditions to see these stocks soar to even greater heights. Over the last 24 years (2000 through 2023), using a 1-week rebalance, the average annual return has been 36.3% vs. the S&P's 7.0%, which is 5.2 x the market. Small-Cap Growth: Small-caps have historically outperformed the market time and time again. Often these are newer companies in the early part of their growth cycle, which is when they grow the fastest. This strategy combines the aggressive growth of small-caps with our special blend of growth and valuation metrics for explosive returns. Over the last 24 years (2000 through 2023), using a 1-week rebalance, the average annual return has been 44.9%, beating the market by 6.4 x the returns. Filtered Zacks Rank 5: This strategy leverages the Zacks Rank #1 Strong Buys, and adds two time-tested filters to narrow the list of stocks down to five high probability picks each week. Over the last 24 years (2000 through 2023), using a 1-week rebalance, the average annual return has been 44.7%, which is also 6.4 x the market. The best part about these strategies (aside from the returns) is that all of the testing and hard work has already been done. There's no guesswork involved. Just point and click and start getting into better stocks on your very next trade. Where To Start There's a simple way to add a big performance advantage for your stock-picking success. It's called the [Zacks Method for Trading: Home Study Course]( With this fun, interactive online program, you can master the Zacks Rank in your own home and at your own pace. You don't have to attend a single class or seminar. Zacks Method for Trading covers the investment ideas I just shared and guides you to better trading step by step, plus so much more. You'll quickly see how to get the most out of the proven system that has more than doubled the market for over three decades. Discover what kind of trader you are, how to find stocks with the highest probability of success, and how to trade them so you can consistently beat the market no matter where stock prices are headed. You'll get the formulas behind our top-performing strategies suited for a variety of different trading styles. The best of these strategies produced gains up to +62.6% in 2023 while the S&P 500 gained 26.2%.¹ The course will also help you create and test your own stock-picking strategies. Today is the perfect time to get in. I'm giving participants free hardbound copies of my book, Finding #1 Stocks, a $49.95 value. Its 300 pages unfold virtually every trading secret I've learned over the last 25 years to beat the market. Please note: Copies of the book are limited and your opportunity to get one free ends Saturday, July 20, unless we run out of books first. If you're interested, I encourage you to check this out now. 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